APPELLATE TRIBUNAL INLAND
REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.274/IB/2023
(Tax
Year, 2021)
******
|
M/s Pakistan Mobile Communications Limited; Jazz
Digital Head Office, 1-A, IBC-1 Building, F-8 Markaz, Islamabad. NTN: 0802694 |
|
Appellant |
|
|
Vs |
|
|
Commissioner Inland Revenue, Range-IV, LTO,
Islamabad. |
|
Respondent |
Appellant By: Mr.
Rashid Mehmood, FCCA
Mr. Zainul Hassan, ACA
Respondent BY: Mr.
Hassan Ali Khan, L.A
Mr. M. Alam, Addl. CIR
Date of Hearing: 15.05.2025
Date of Order: 15.05.2025
ORDER
M. M. AKRAM (Judicial Member):
The appellant has preferred the present
appeal to challenge the order dated January 10, 2023 (hereinafter referred to
as the “impugned order”), passed by the Commissioner Inland Revenue (Appeals-I),
Large Taxpayer Office (LTO), Islamabad, under Section 129 of the Income Tax
Ordinance, 2001 (“the Ordinance”). The impugned order pertains to the
tax year 2021 and is being assailed on the grounds outlined in the memorandum
of appeal.
2. The brief facts of the case
are that the appellant is a company duly incorporated under the Companies
Ordinance, 1984, and is engaged in the business of providing cellular mobile
services under a license issued by the Pakistan Telecommunication Authority.
The appellant filed its return of income for the tax year 2021 on September
30, 2021, declaring a net income of Rs. 89,680,907,626. In accordance
with Section 120(1)(b) of the Ordinance, the return was treated as an
assessment order. Subsequently, upon examination of the filed return, the
Additional Commissioner Inland Revenue (Addl. CIR) found certain aspects
of the return to be erroneous and prejudicial to the interest of revenue.
Consequently, proceedings were initiated through the issuance of a show cause
notice dated November 19, 2021, under Section 122(9) read with
Section 122(5A) of the Ordinance. The primary basis of the alleged error
pertained to the treatment of direct and management expenses. The contents of
the show cause notice were later incorporated into the amended assessment order
passed under Section 122(5A) of the Ordinance. In response to the notice, the
appellant submitted a detailed reply on December 15, 2021. After considering
the response, the Addl. CIR passed an amended order on December 23, 2021, under
Section 122(5A), thereby raising a significant tax demand amounting to Rs.
16,866,492,829.
3. Aggrieved by the amended
assessment, the appellant filed an appeal before the Commissioner Inland
Revenue (Appeals-I), LTO, Islamabad. Vide the impugned order dated January 10,
2023, the learned CIR(A) disposed of the appeal by confirming certain issues
while remanding others back to the Addl. CIR for reconsideration. Dissatisfied
with the partial relief granted, the appellant has now filed the instant appeal
before this Tribunal, challenging the impugned appellate order on various
grounds set forth in the memorandum of appeal.
4. The matter came up for hearing on May 15, 2025. Both parties were
afforded full opportunity to present their respective cases, and their learned
counsels were heard at considerable length. In addition to oral submissions,
written arguments were also submitted by both sides and have been duly placed
on record. For the sake of clarity and brevity, the contentions advanced by the
learned Authorized Representatives (ARs) will be addressed issue-wise in the
subsequent paragraphs.
5. Upon a thorough examination
of the arguments presented, the grounds raised in the appeal, and the written
submissions filed by the parties, the following legal issues arise for
adjudication. In view of their foundational significance to the matter, we shall
first address these legal questions before proceeding to evaluate the merits of
the case:
Legal Issues for Consideration:
i.
Whether under the facts and
in the circumstances of the case Section
122(5A), pre-amendment (before the Finance Act, 2021), or post-amendment (after
the Finance Act, 2021), would apply?
ii.
Whether the expression 'if
he considers' in Section 122(5A) of the Ordinance empowers the Commissioner
to amend a deemed assessment order solely on the basis of his subjective
satisfaction, or whether it is a prerequisite for the valid assumption of
jurisdiction that such satisfaction be based on objective, tangible material
demonstrating that the original assessment was erroneous and prejudicial to the
interest of revenue?
iii.
Upon the filing of a return
under Section 114 of the Ordinance, can the Commissioner immediately initiate
amendment proceedings under Section 122, or must the Commissioner first
determine whether the return is complete and has been validly treated as
assessed under Section 120, particularly in light of Section 120(6), which
provides that an incomplete return shall be treated as complete after the
expiry of a specified period?
iv.
Whether the taxpayer’s
right to revise under Section 114(6) of the Ordinance can be rendered
ineffective by premature departmental action?
v. Whether the instant
proceedings conflict with the principles of legitimate expectation of the
taxpayer and procedural fairness?
FINDINGS OF THE TRIBUNAL ON THE LEGAL ISSUES
6. Having carefully considered the arguments advanced by both
parties, examined the documentary record, and in light of the admitted facts,
that the appellant filed its income tax return along with audited accounts on 30.09.2021,
the show cause notice under Section 122(5A) was issued on 19.11.2021,
and that the amendment to Section 122(5A) was introduced through the Finance
Act, 2021, the Tribunal proceeds to first determine the first question reproduced as under:
i. Whether under the facts and
in the circumstances of the case Section 122(5A),
pre-amendment (before the Finance Act, 2021) or post-amendment (after the
Finance Act, 2021), would apply?
For convenience both pre-amendment and
post-amendments in subsection (5A) of section 122 of the Ordinance are
reproduced below:
Pre Finance Act, 2021 Amendment:
(5A). Subject to subsection (9), the Commissioner may, after making or causing to be made, such enquiries as he deems necessary 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.
Post Finance Act, 2021 Amendment:
(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. (emphasis supplied)
6.1. The department’s argument is anchored on the interpretation rendered by
the Honourable Islamabad High Court in the case of Bestway Cement
Limited v. Additional Commissioner Inland Revenue, (2018 PTD 977), the question before the court was that whether the
show-cause notices issued under Section 122(9) of the Ordinance with respect to
Tax Years 2010, 2011 and 2012 were without jurisdiction on the premise that the
power to make inquiries under Section 122(5A) was inserted through an amendment
brought vide Finance Act, 2012,
hence, whether it was prospective or retrospective in operation. The Court drew a clear
distinction between procedural and substantive legal provisions and concluded
that even procedural amendments cannot be applied retrospectively when they
affect vested rights. Specifically, the Court held that the power introduced in
2012 for the Commissioner to inquire into deemed assessment orders under
Section 122(5A) could not be applied to tax years prior to the amendment (i.e Tax Years 2010, 2011, and 2012), because it substantially
altered the rights and obligations of the taxpayer and the scope of
departmental authority. Hence,
the show-cause notices were set aside in the writ jurisdiction by the learned Single
Judge of Islamabad High Court.
6.2 In the present case, admittedly the case is not with respect to
pre-insertion of the power to make inquiries but whether Section 122(5A) would
apply in its post-deletion form when the power to make inquiries was removed or
when this power was still available. The Finance Act, 2021
removed the power of the Commissioner to conduct inquiries under Section
122(5A) with
effect from 01 July 2021. The department contends that this omission cannot be applied
retrospectively to deny the Commissioner powers that existed on the first
day of the relevant tax year, i.e., January 1, 2020, to December 31,
2020, which marks the beginning of Tax Year 2021. Therefore, even
though the notice under Section 122(9) was issued after the amendment took
effect (on 19.11.2021), it related to the tax
year in which the authority was legally intact. This argument is supported by
the settled legal maxim that a taxpayer’s rights and obligations are to be
evaluated according to the law as it existed on the first day of the tax
year. This principle ensures legal certainty, allowing both the taxpayer
and the department to proceed with clarity about their respective positions
throughout the assessment cycle. The retrospective application of legislative
amendments which adversely affect the taxpayer or limit administrative powers
would run contrary to the basic tenets of fiscal fairness and due process.
6.3 Moreover, the Department
also placed reliance on an
unreported case ITR No. 04 of 2015 (Telenor Pakistan (Pvt.) Ltd. v. ATIR), which reinforces the proposition that so long as the Commissioner is satisfied
that an assessment is erroneous in so far as it is prejudicial to the interest
of revenue, and the taxpayer is afforded an opportunity of hearing under
Section 122(9), the preconditions for invoking Section 122(5A) are met. Nowhere
did the Court hold that the enquiry must be completed or even initiated prior
to a statutory amendment — rather, the operative legal framework at the time of
the tax event governs such powers.
6.4 The department’s reliance is also on a recent decision in
ITR No. 01 of 2024 (Telenor Pakistan v. CIR etc.), where
the Honourable Islamabad High Court dealt directly with the effect of the 2021
amendment on an assessment order passed
under Section 122(5A) on 30.11.2022 for Tax Year 2020,
issued after the amendment came into force. The Court ruled that since the tax
year in question began before the legislative change, the amended law did not
apply, and departmental action had to be assessed in accordance with the law as
it existed at the start of the tax year.
6.5 In our opinion none of the
arguments, which the learned counsel for the department has advanced before us,
have any substance. There can be no doubt whatsoever that the provisions of
sections 122(5) and 122(5A) of the Ordinance are the provisions of the
machinery sections enacted for the purposes of computation of the tax liability
of the taxpayer, which is fixed and charged by the charging sections of the
Ordinance. As has been often said, there are three stages in the imposition of
a tax in a
taxing statute, (i) charging provisions; (ii) machinery or assessment
provisions; and (iii) recovery provisions as were observed by His Lordship Mr. Justice.
Rustam S. Sidhwa, in M/s Friends Sons and Partnership Concern
v. The Deputy Collector Central Excise and Sales Tax, Lahore and others (PLD
1989 Lahore 337) and by the Federal Court in Chatturam v. Commissioner of Income-tax,
[(1947) 15 I T R 302 (F C)]. The provisions of Section 122(5) and 122(5A) of the
Ordinance fall in the second category, for dealing with the amendment of assessments
and determining the amount of tax. With respect to these categories of
provisions, the general rule is that the language present in such a procedural
provision at the time of invoking it applies, the relevant consideration is the
statutory provision at the time of invocation, not the tax year involved. If
the show-cause notice is issued during the post-amendment era, when no power to
make inquiries is available in the statute book, the department is prevented
from importing the language and reading it into a statute, when the same is not
present at the time of issuance of a notice or an order. For example, if a
provision empowers an Add CIR to pass an order in 2025 and the order is
also passed in 2025 then it cannot be argued that since only CIR had the
power to pass an order in 2024 and since the tax year in question is also 2024,
hence, Add CIR has no jurisdiction to issue the notice. For machinery
provisions, it is the provision at the time of invocation that is relevant not
the Tax Year, despite being liberally construed. For charging provisions, which
are substantive in nature, it is the Tax Year that is relevant because a charge
cannot be created with respect to a Year when a particular transaction or
activity was not taxable, these provisions are strictly construed as any
benefit of the doubt goes to the taxpayer. This is the general position based
on sound principles of statutory interpretation and a plethora of case law. See
2023 PTD 1679 [Peshawar]; 2023 PTD 750 [Peshawar]; 2022 PTD
812 [Sindh]; Asfandyar Khan Tareen, Syntax of Sales Tax on Services (2018, Pakistan Law House), Chapter 8.
The Lahore High Court in the case of Reliance Commodities v. Federation of
Pakistan, (2020 PTD 1464) also held that Section 122(5A)
read with Section 122(9) of the Ordinance are machinery provisions.
6.6 There exists a clear and
significant distinction between substantive law and procedural law. For a
proper understanding, the distinction is elaborated as follows:
(i) Substantive law is concerned
with the creation, definition, and regulation of rights and obligations—for
instance, the authority of the State to impose taxes. In contrast, procedural
law outlines the methods and mechanisms through which these rights are enforced
or remedies are sought for their violation.
(ii) According to Black's Law Dictionary,
"procedural law" is defined as follows:
"That
which prescribes the method of enforcing rights or obtaining redress for their
violation; the laws that merely stipulate the manner in which such rights and responsibilities
are to be exercised and enforced in a court of law are considered procedural in
nature."
(iii) The same dictionary defines "substantive
law" as:
"That
part of the law which establishes, defines, and governs rights and duties of parties,
as distinguished from procedural, adjective, or remedial law."
(iv) Halsbury's Laws of India, Volume VII, paragraph
65.001, articulates the fundamental difference between the two branches of law
in the following manner:
"Substantive
law sets out the rights and liabilities of parties, grants legal status, or
imposes and delineates the nature and scope of legal duties. Procedural or
adjective law, on the other hand, lays down the practice, procedure, and
framework through which these rights and liabilities are enforced or recognized
by a court or a duly constituted tribunal. Procedural law thus serves a
subordinate role to substantive law. It cannot confer a right or take one away
unless that right is first established or denied by substantive law."
6.7 The Hon’ble Supreme Court of
Pakistan has consistently held that provisions of Section 122 are procedural,
as they govern the process of amending assessments rather than imposing new tax
liabilities. The Supreme Court of Pakistan in Commissioner Of Income Tax,
Peshawar Vs Messrs. Islamic Investment Bank Ltd (2016
PTD 1339) held that the procedural amendments have a retrospective effect.
The Court also held that the liability
to pay income tax arises at the close of the income year/accounting year,
thereby creating a vested right in favor of the State, irrespective of when the
assessment or quantification procedures take place. These assessment
procedures are merely machinery provisions for quantifying an already accrued
liability. Relevant
paragraphs of the judgment are reproduced below:
“6. When a Statute repeals an earlier Statute and it is an
unqualified repeal, then the effect of such repeal is that the earlier Statute
gets repealed in its entirety. However, where the Legislature intends to
preserve any power or inchoate right in relation to the repealed Statute, then
a saving clause is incorporated in the repealing Statute whereby certain
provisions are preserved from getting repealed to the extent and with regard to
the subject mentioned in the saving clause. The provisions of the repealed law
that are so preserved are to be regarded as if the repealed Statute was still
in operation. Now the Income Tax Ordinance, 1979, stood repealed with effect
from 30.06.2002 and was replaced by the Income Tax Ordinance, 2001, which came
into operation immediately thereafter i.e. with effect from 01.07.2002. Section
239(1) of the Income Tax Ordinance, 2001, provides that any assessment that was
to be made for the income years ending on or before 30.06.2002, the same had to
be made under the provisions of the repealed Income Tax Ordinance, 1979, as if
Income Tax Ordinance, 2001, has not come into force. The question that arose
before the forum below was whether the Commission Income Tax was justified in
revising an assessment ORDER: relating to the period covered under the repealed
Income Tax Ordinance, 1979, by invoking the provisions of Section 122 (5A) of
the Income Tax Ordinance, 2001, that was inserted on 01.07.2003 i.e. one year
after the Income Tax Ordinance, 2001, came into operation. As per the
interpretation put on section 122 (5A) by the Sindh High Court in the case of
Honda Shahrah-e-Faisal, the department could not have revised the assessment
ORDER: in question by invoking section 122(5A) of Income Tax Ordinance, 2001,
that was inserted on 01.07.2003 and being prospective in nature cannot be given
retrospective application. In the Honda Shahrah-e-Faisal case it was further
held that as the provisions of section 66A of the repealed Income Tax
Ordinance, 1979, were also not saved under the Saving Clause i.e. section 239
of the Income Tax Ordinance, 2001, the same also could not be applied to reopen
the assessment ORDER: in question.”
…………………………….
15.
Apart from holding that provisions of section 239(1) of the Income Tax
Ordinance, 2001, have a retrospective application, the controversy in the
present case can also be looked at from a distinct perspective. The tax laws
are a body of rules and regulations under which the State has a claim on the
taxpayers so that they may pay to the State a part of their incomes at the
specified rates. This liability to pay income tax accrues on the taxpayer on the
last day of the income year/accounting year, though the tax becomes payable
after it is quantified in accordance with the procedures laid down in the
Income Tax law. Thus a vested right in favour of the State is created at
the end of each accounting year, through the exercise of (i) making an
assessment on the basis of ascertainable data of income and expenditure, or
(ii) revising an assessment ORDER: where it is found that there is sufficient
material to hold that the original assessment was prejudicial to the interest
of the revenue, takes place at some later stage. These procedural
exercises are undertaken only with the object of reaching at the correct
calculation of yearly income but the real liability to pay tax had already
accrued on the last day of the income year i.e. on the last day of the
accounting year thereby creating a vested right in favour of the State. It may
be understood as an expense that has already accrued but is payable later.
Reference can also be made to section 9 of the Income Tax Ordinance, 1979, with
regard to the creation of the charge on the basis of income year. Thus
seeking revision of a tax return at any subsequent stage has nothing to do with
the creation of charge on the tax-payer that has become absolute on completion
of the income year/accounting year.
16. In this regard reference can also be made to cases
from Indian jurisdiction. In the case of Chatturam v. Commissioner of Income
Tax (AIR 1947 FC 32) and in the case of Williams v. Henry Williams Ltd. it was
held that the liability of Income Tax was definitely and finally created by the
charging section and the provisions of assessment etc. were machinery
provisions only for the purpose of quantifying the liability. In the case of
Wallace Brothers Co. Ltd. v. Commissioner of Income Tax (AIR 1948 PC 118 = PLD
1948 PC 67) also it was held that "..................... the rate of tax
for the year of assessment may be fixed after the close of the previous year
and the assessment will necessarily be made after the close of that year. But
the liability to tax arises by virtue of the charging section alone, and it
arises not later than the close of the previous year, though quantification of
the amount payable is postponed." The Indian Supreme Court in the case of
Kalwa Devadattam v. Union of India (AIR 1964 SC 880) also held the same in
these words- "Under the Indian Income-tax Act liability to pay income-tax
arises on the accrual of the income, and not from the computation made by the
taxing authorities in the course of assessment proceedings; it arises at a
point of time not later than the close of the year of account."
6.8 The Indian Supreme
Court in
Hitendra Vishnu Thakur v. State of Maharashtra (AIR 1994 SC 2623) laid down the
following principles regarding the ambit and scope of an amending Act and its
retrospective application:
(i) A statute
which affects substantive rights is presumed to be prospective in operation
unless made retrospective, either expressly or by necessary intendment, whereas
a statute which merely affects procedure, unless such a construction is
textually impossible, is presumed to be retrospective in its application,
should not be given an extended meaning and should be strictly confined to its
clearly defined limits.
(ii) Law relating to forum and limitation is
procedural in nature, whereas law relating to the right of action and right of
appeal even though remedial is substantive in nature.
(iii) Every litigant has a vested right in
substantive law but no such right exists in procedural law.
(iv) A procedural statute should not generally
speaking be applied retrospectively where the result would be to create
new disabilities or obligations or to impose new duties in respect of
transactions already accomplished.
(v) A statute which not only changes the procedure but also
creates new rights and liabilities shall be construed to be prospective
in operation unless otherwise provided, either expressly or by necessary
implication.
6.9 There is a fundamental
difference in the nature and impact of an addition of power versus the deletion
of a procedural step.
a) The
2012 addition to Section 122(5A) conferred a new power to conduct inquiries,
which was a substantive change affecting the taxpayer's vested right to
finality.
b) The
2021 deletion, conversely, removes a procedural requirement. It does not
introduce a new liability, extend a limitation period, or re-open a finalized
assessment in a manner that creates a new burden or disadvantages the taxpayer.
Instead, it merely streamlines the Commissioner's process for exercising an
existing power to amend assessments that are "erroneous in so far it is
prejudicial to the interest of revenue"—a substantive condition that
remains unchanged.
(i) The omission of the enquiry-related
wording is purely procedural. It regulates how the Commissioner exercises an
existing power to amend assessments, rather than creating a new power or
affecting a substantive right. When a procedural step is removed, and this
removal does not create new disabilities or obligations for the taxpayer, it
should generally be given retrospective effect. The taxpayer's fundamental
right to a fair hearing, as enshrined in Section 122(9), remains a separate and
substantive safeguard that is unaffected by this deletion. The Commissioner is
still bound to confront the taxpayer and provide an opportunity of being heard
before amending an assessment.
(ii) Unlike the 2012 addition to Section
122(5A), the 2021 deletion does not impinge upon any vested right of the taxpayer,
such as the right to finality of an assessment. It simply modifies the internal
process for the tax authority to reach a conclusion regarding an assessment's
erroneousness and prejudice to revenue. The deletion, being purely procedural
and non-prejudicial to vested rights, should logically operate retrospectively.
6.10 Keeping
in view the above discussion the following question may also arise:
Does the Commissioner
possess a vested right under Section 122(5A) of the Income Tax Ordinance, 2001?
If so, how does the legislative amendment introduced by the Finance Act,
2021—particularly the omission of the phrase “after making, or causing to be made,
such enquiries as he deems necessary”—impact the exercise of this vested right?
Answer:
Yes, the Commissioner
exercises a vested statutory authority under Section 122(5A) of the Ordinance
which is procedural in nature and derives from the State’s substantive and
vested right to levy and collect taxes. This vested right of the State to tax
arises at the close of the relevant income year when the income becomes
chargeable under the law. Section 122(5A) serves as the procedural instrument
through which the Commissioner can enforce this substantive right by amending
assessments that are found to be erroneous and prejudicial to the interest of
revenue. The Commissioner’s authority to amend such assessments does not
originate from personal entitlement but flows from the State’s established
right to accurate tax collection. The Finance Act, 2021 amended Section
122(5A) by omitting the phrase “after making, or causing to be made, such
enquiries as he deems necessary.” This amendment was procedural in
nature and did not affect the core substantive right of the State to
assess and collect tax, nor did it curtail the Commissioner’s authority to
amend assessments under Section 122(5A).
6.11 The Federal Board of Revenue (FBR), through Circular No. 02 of
2021-22 (dated July 1, 2021), clarified that while the amendment removed
the procedural requirement for inquiries without case selection under Section
177, it did not eliminate the Commissioner’s power to amend assessments
where they are erroneous and prejudicial to revenue interests.
6.12 Thus, the Commissioner continues to be empowered to amend such
assessments, but must still establish—based on facts—that the original
assessment is erroneous and prejudicial to the interest of revenue. The
omission of the enquiry requirement merely streamlined the process; it neither
created new vested rights nor removed existing ones. The State’s and the
Commissioner’s powers remain substantively unchanged—only the procedural steps
leading to the amendment have been modified.
6.13 Based
on the foregoing discussion, the amendment introduced to Section 122(5A)
through the Finance Act, 2021 is procedural in nature. As such, it applies at
the time of issuing the show cause notice, regardless of whether the relevant
tax year falls before or after the amendment. Consequently, the procedural
change has retrospective application in terms of its effect on the process,
without affecting the substantive rights or obligations involved. Hence, this question is answered in favour of the appellant
taxpayer.
7. Now we turn to the second question
reproduced below:
ii. Whether the expression 'if he considers' in Section
122(5A) of the Ordinance empowers the Commissioner to revise a deemed
assessment order solely on the basis of his subjective satisfaction, or whether
it is a prerequisite for the valid assumption of jurisdiction that such
satisfaction be based on objective, tangible material demonstrating that the
original assessment was erroneous and prejudicial to the interest of revenue?
7.1 Before addressing the question at hand, it
is pertinent to first reproduce the show cause notice issued by the Assessing
Officer in the present case under section 122(5A) of the Ordinance. Upon
reviewing the return and the audited financial statements attached to it, the
Assessing Officer concluded that the deemed order was erroneous and prejudicial
to the interests of the revenue, as detailed below:
“You filed return of income for the Tax Year 2021 which is deemed
assessment order in terms of section 120 of the Income Tax Ordinance 2001
("the Ordinance"). However, perusal of the said deemed assessment
order and your final accounts filed for the Tax Year 2021 revealed that the
same is erroneous insofar as prejudicial to the interest of revenue on the
following grounds:
(I) ADVERTISEMENT/PUBLICITY/PROMOTION COST RS 7,989,650,000/-
You claimed expense on account of marketing/advertisement/publicity/
promotion to the tune of Rs 7,989,650,000/- (Ref Note 30 to the accounts)
However, it is an established fact that this expense is capital in nature.
Thus, the same is required to be amortized under the law. In view of the
foregoing, you are required to explain why expense claimed under the head
advertisement/publicity/promotion may not be amortized and 96% of the total
claim on account of this expense be disallowed under the law?
(II) CUSTOMER ACQUISITION COST RS 3,318,606,000/-
As per note 13 to the audited accounts, you have claimed Rs.
3,318,606,000/- as Customer Acquisition Cost (Activation Tax) The said
expense is borne by the subscribers, therefore, it is not your
liability However, you have claimed the same erroneously in violation of the
provisions of section 20 of the Ordinance. Therefore, your explanation is
required on the fact that why this expense be disallowed under the law.
(III) STATUTORY LEVIES
AND CUSTOMER RELATED COSTS RS2,395,557,000/-
As per note 29 to the audited accounts, you have claimed Rs
2,395,557,000/- as statutory levies and customer related costs. The said
expense is also borne by the subscribers therefore, it is not your
liability However, you have claimed the same erroneously in violation of the
provisions of section 20 of the Ordinance. Therefore, your explanation is
required on the fact that why this expense be disallowed under the law?
(IV) PROVISION FOR OBSOLESCENCE RS 141,529,000/-
As per audited accounts, you have claimed provision for obsolescence to
the tune of Rs. 141,529,000/-The claim is in the contravention of section 34(3)
of the Ordinance and liable to be disallowed under the law Your explanation is
required on this account
(V) PROVISION
FOR SITE DISMANTLING AND RESTORATION COSTS RS 132,010,000/-
As per audited accounts, you have claimed provision for site dismantling
and restoration costs to the tune of Rs. 132,010,000/- The claim is in the
contravention of section 34(3) of the Ordinance and liable to be disallowed
under the law Your explanation is required on this account
(VI) TAX
DEPRECIATION/INITIAL ALLOWANCE RS 21,898,541,601/, TAX AMORTIZATION RS
8,394,579,294/-
During the year under consideration, you introduced addition to the
fixed assets and consequently claimed initial as well as normal depreciation on
your all fixed assets and amortization on your intangible assets which has been
allowed in your deemed assessment order However, you remain failed to comply
with the Rule 12 of the Income Tax Rules while claiming this expense which is
prerequisite under the law. As you have failed to comply with Rule 12 of the
Income Tax Rules 2002 as amended from time to time, therefore, you are required
to explain why this expense may not be disallowed under the law?
(VII) EXCHANGE LOSS RS.
74,468,000/-
As per note 31 of the audited accounts, you claimed expense on account
of exchange loss at Rs. 74,468,000 which is unrealized and notional
in nature and not allowable under the Ordinance. Therefore, you are required to
explain why the same may not be disallowed and added back into your taxable
income?
(VIII) UNABSORBED
DEPRECIATION OF PREVIOUS YEARS RS. 37,381,748,572/-
During the year under consideration, you have claimed credit of
unabsorbed tax depreciation and tax amortization of intangible assets contrary
to the fact that no such credit was available to your company following the
amendments made for the tax year 2011 to tax year 2020. Therefore, the
aforesaid amount legally and factually warrants to be disallowed
(IX) REFUND
ADJUSTMENT OF OTHER YEARS AGAINST DEMAND OF THIS YEAR RS 666,569,446/-
As per code No. 923198 to the tax return for the year under
consideration, you have claimed refund adjustment in respect of previous years
at Rs 666,569,446 against the demand for tax year 2021 Whereas no such
determined refund is available on record Therefore, the aforesaid amount
legally warrants to be disallowed. Please explain?
(X) WRONG
CLAIM OF TAX CREDIT U/S 148 ON IMPORT STAGE RS. 1,792,412,295/-
Your return income shows that you have adjusted tax deducted u/s 148 of
the Ordinance against your tax liability However, only industrial undertaking
can adjust tax deducted at the import stage while you are not an industrial
undertaking under the Ordinance Therefore, you are required to explain why this
adjustment of tax may not be disallowed and tax deducted u/s 148 of the
Ordinance in your case be treated as final tax under the law?
This notice is issued u/s 122(9) read with section 122(5A) of the
Ordinance and you are requested to furnish your reply on the observations
stated supra by 3/12/2021, positively Please note that in case of
non-compliance or unsatisfactory reply, proceedings will be finalized in
accordance with the law.”
7.2 We have carefully examined the record, the
contents of the show cause notice issued under section 122(9) read with section
122(5A) of the Ordinance, and the arguments advanced by the appellant. Upon
meticulous consideration, the following findings are rendered:
A. Jurisdictional Validity of
the Notice under Section 122(5A)
7.3.1 The language
employed in Section 122(5A), which provides that the Commissioner "may
amend if he considers" that the assessment order is erroneous, vests
the authority with a degree of discretion. The phrase “if he considers”, is
although subjective in nature, but it cannot be construed as vesting the
Commissioner with unfettered or unreviewable discretion. It is a well-settled
principle of administrative law that statutory powers, even when conferred in
seemingly subjective terms, must be exercised in accordance with the law, upon
relevant considerations, and based on cogent material evidence. The rule of law
requires that the discretion is to be bounded by reason and substantiated by
evidence. In the classic case of Gadoon
Textile Mills v. WAPDA, 1997 SCMR 641
our Supreme Court laid down guidelines for proper exercise of discretion.
“To make the exercise of discretionary power valid
it is necessary that apart from being legal it is also reasonable. While
conferring discretion on an authority the statute does not intend to arm such
Authority with unfettered discretion which may be beyond the limits of reason
and comprehension of a man of ordinary intelligence.”
A similar point was raised by the Bombay High Court in Commissioner
Of Income-Tax vs Gabriel India Ltd, [1993] 203 ITR 108 (BOM) where
it was held that:
“The consideration of the Commissioner as to whether an
order is erroneous in so far as it is prejudicial to the interests of the
Revenue must be based on materials on the record of the proceedings called for
by him. If there are no materials on record on the basis of which it can be
said that the Commissioner acting in a reasonable manner could have come to
such a conclusion, the very initiation of proceedings by him will be illegal
and without jurisdiction. The Commissioner cannot initiate proceedings with a
view to starting fishing and roving enquiries in matters or orders which are
already concluded. Such action will be against the well-accepted policy of law
that there must be a point of finality in all legal proceedings, that stale
issues should not be reactivated beyond a particular stage and that lapse of
time must induce repose in and set at rest judicial and quasi-judicial
controversies as it must in other spheres of human
activity.................................. It is an important decision and the
same cannot be based on the whims or caprice of the revising authority. There
must be materials available from the records called for by the Commissioner.”
7.3.2 Similarly in Russell
Properties Pvt. Ltd. vs A. Chowdhury, Addl. Commissioner, [1977] 109
ITR 229 (CAL) the court held that:
“There
must be material before the Commissioner before he passes the order to come to
the conclusion that the order sought to be rectified was erroneous in so far as
it was prejudicial to the interest of the revenue.”
7.3.3 Reliance can
also be placed on Harish
Chander Suri vs Assistant Commissioner of Income Tax,
(1998) 62 TTJ (DEL) 550
where Delhi High
Court stated that:
“There is no case for invoking the power
under section 263 of the Act particularly when the learned
Commissioner did not give a specific finding and pinpoint the order which is
erroneous. The scope of interference under section
263 is
not to set aside merely unfavourable orders and bring to tax some more money to
the treasury nor is the section meant to get at sheer escapement of revenue
which is taken care of by other provisions in the Act. The prejudice that is
contemplated under section 263 is prejudice to the income-tax administration as a
whole. This section is to be invoked not as a jurisdictional corrective or as a
review of a subordinate's order in the exercise of the supervisory power, but
it is to be invoked and employed only for the purpose of setting right
distortions and prejudices to the Revenue. In the absence of any specific
error, the Commissioner cannot merely set aside the order for finding out if
any prejudice is caused to the Revenue”
7.3.4 It is also
pertinent to note that the discretion given to the Commissioner under Section 122(5A)
is not unbounded or immune from judicial scrutiny. Courts are not bound to
accept blindly the authority’s view as conclusive. Rather, courts are entitled
and indeed required to inquire whether the Commissioner had a factual and legal basis
to form such a view. Lord Atkin in the case of Liversidge v. Andersen,
[1942] AC 206 pages 228 to 229 said that:
“In
this country, amid the clash of arms, the laws are not silent. They may be
changed, but they speak the same language in war as in peace. It has always
been one of the pillars of freedom... that the judges... stand between the
subject and any attempted encroachments on his liberty by the executive, alert
to see that any coercive action is justified in law.”
7.3.5 The
Commissioner is not permitted to proceed on mere suspicion, assumptions, or
conjecture. The phrase “if he considers” does not oust judicial
scrutiny, rather, it obligates the authority to form an opinion that a
reasonable person, properly instructed in law, would form on the same material.
To hold otherwise would be to allow arbitrary intrusions into finalized assessments,
which runs contrary to the principles of fairness, certainty, and legal
predictability. Reliance can be placed on M. A. Rasheed And Ors vs The State Of Kerala, 1974 AIR SC 2249 where the Supreme Court of India
held that:
“Where
powers are conferred on statutory authorities to exercise the same when
"they are satisfied" or when "it appears to them" or when
"in their opinion" or if they consider that "a certain state of
affairs exists" or when powers enable the statutory authorities to take
such action as they think fit in relation to subject-matter, the court would
not readily defer to the conclusiveness of an executive authority's opinion as
to the existence of a matter of law or fact upon which the validity of the
exercise of the power is predicated. Where reasonable conduct is required, the
criterion of reasonableness is not subjective but objective. Administrative
decisions in the exercise of powers even if conferred in subjective terms are
to be made in good faith on relevant consideration. The courts can enquire
whether a reasonable man would have come to the decision in question. The
standard of reasonableness to which an administrative body is required to
conform may range from the court's own opinion of what is reasonable to the
criterion to what a reasonable body might have decided. Courts can find out
whether conditions precedent to the formation of the opinion have a factual
basis.”
7.3.6 Thus the satisfaction must be premised on tangible, credible, and material
evidence, rather than mere assumptions, suppositions, or
presumptive reasoning. This interpretation aligns with the expression
“erroneous in so far it is prejudicial to the interest of revenue” found in
Section 66A of the repealed Income Tax Ordinance, 1979, as interpreted in the
cases of Glaxo Laboratories Limited v. Inspecting Assistant
Commissioner of Income Tax and others, (1992 PTD 932) and M/s
S.N.H. Industries (Pvt.) Ltd. v. Income Tax Department and another,
(2004 PTD 330). It is also well established that error and prejudice must be
clearly evident from the show cause notice, with no room for roving inquiries
or fishing expeditions. Judgments in the cases of Commissioner Inland
Revenue, Zone-I, LTU v. MCB Bank Limited, (2021 PTD 1367); Honda
Atlas Cars (Pakistan) Limited v. Appellate Tribunal Customs, Excise and Sales
Tax, (2021 PTD 1806); and Caretex v. Collector of Sales
Tax and Federal Excise, (2013 PTD 1536) support this position.
7.3.7 In the ancient Rooke's
case, (1598) 5 Co. Rep. 99b which is still a famous
precedent on the exercise of discretion, the Commissioner of sewers had levied
charges for repairing a river bank on one adjacent owner instead of
apportioning it among all the owners, who had benefited. In disallowing such an
exercise of discretion, it was held that:-
“notwithstanding the words of the commission give
authority to the commissioners to do according to their discretions, yet their
proceedings ought to be limited and bound with the rule of reason and law. For
discretion is a science or understanding to discern between falsity and truth,
between wrong and right, between shadows and substances, between equity and
colourable glosses and pretences, and not to do according to their wills and
private affections.”
7.3.8 In the present
case, the record reveals that the Commissioner proceeded to amend the
assessment without placing on record any credible, concrete, or corroborative
evidence indicating that the original order suffered from an error, much less
one that was prejudicial to the interest of revenue. The order merely asserts
that the assessment is “erroneous,” but fails to delineate the nature of the
error or how it impacts the revenue. The proceedings, thus, appear to be
initiated on unverified assumptions rather than on any material irregularity
supported by law or fact.
7.3.9 Accordingly, in
the absence of concrete
material evidence, the Commissioner’s action cannot be
sustained merely on the ground that he “considers” the assessment order to be
erroneous. Any such action lacking a factual
foundation is liable to be set aside as a misuse of statutory
discretion. In view of the foregoing, we hold that the Commissioner’s
invocation of Section 122(5A) in this instance is passed without lawful
justification or evidentiary support, and thus is declared to be invalid and void ab initio.
7.3.10 The Tribunal finds that in the instant
case, the show cause notice suffers from a foundational defect, in that it is predominantly based on conjectural
assertions without reference to any new material, concrete
findings, or independent enquiry conducted by the Commissioner prior to
issuance of the notice. Each item raised in the notice appears to rest on interpretative disagreements or
presumptive conclusions, which do not meet the evidentiary
threshold required under the law.
B. Head-wise Analysis of the Show Cause Notice
1. Advertisement/Publicity/Promotion
Cost Rs.7,989,650,000/
7.4.1 The assessing officer has alleged that the
expenditure incurred under the head of marketing and promotional activities is
capital in nature and thus subject to amortization. However, the Tribunal notes
that no new material or
specific transaction has been cited to substantiate that the
expense created an enduring benefit or resulted in the acquisition of a capital
asset. The assertion that “it is an established fact” is unsupported by any citation of law,
accounting standards, or case law, and does not satisfy the
legal requirement for a valid finding of error. In the absence of concrete
evidence, without first determining the nature of the expense, this claim
cannot form the basis for reassessment under section 122(5A) of the Ordinance.
2. Customer
Acquisition Cost – Rs. 3,318,606,000
7.4.2 The show cause notice contends that customer
acquisition costs were erroneously claimed, alleging that these expenses are
borne by subscribers. However, this is a factual
assertion requiring verification through agreements, payment trails, or
industry practice evidence, none of which are present in the
record. The absence of enquiry or corroborative evidence renders this
observation speculative. The Tribunal is of the view that a mere assumption that
the cost is passed on to customers, without establishing the mechanism thereof,
is insufficient to characterize the original claim as erroneous.
3. Statutory
Levies and Customer Related Costs Rs.2,395,557,000
7.4.3 Similar to the foregoing, the assertion that
these expenses were not the taxpayer’s liability is made without any demonstrable material
to prove that the statutory levies were not contractually or statutorily
imposed on the appellant. The burden to prove such assertion rests squarely
with the Revenue Department. In the absence of documentation or analysis of
specific entries, this part of the notice appears to be based on a generic presumption
rather than an informed legal conclusion.
4.
Provision for Obsolescence – Rs. 141,529,000
7.4.4 The claim is contested on the ground that it
violates section 34(3) of the Ordinance. The Tribunal concurs that provisions
are not allowable unless backed by actual expenditure. However, it also notes
that no enquiry has been
made into whether the provision represents a real and
demonstrable write-off of inventory or assets. Without such examination, it
cannot be conclusively stated that the provision is inadmissible under section
34(3). The notice lacks the depth
of enquiry necessary to sustain this ground.
5.
Site Dismantling and Restoration Costs – Rs. 132,010,000
7.4.5 This provision is similarly disallowed for
alleged contravention of section 34(3). However, the Tribunal observes that
where a company is under a contractual
obligation to restore leased sites or comply with regulatory
conditions upon termination, a provision for such future liability is
permissible under established accounting principles and judicial guidance. No
effort has been made to examine the existence of such contractual obligations.
Thus, the rejection is based on a deficient
examination of relevant facts.
6.
Depreciation and Amortization – Rs. 30,293,120,895
7.4.6 The notice alleges non-compliance with Rule 12
of the Income Tax Rules, 2002, as the basis for disallowance of depreciation
and amortization. However, it fails
to identify the specific documentation or procedure allegedly not followed,
nor does it cite any record requisition issued to the taxpayer or their failure
to respond. The Tribunal holds that such a general allegation, without
fact-based enquiry or evidentiary gaps identified, is legally untenable and
does not qualify as an “error” within the meaning of section 122(5A) of the
Ordinance.
7.
Exchange Loss – Rs. 74,468,000
7.4.7 The Department describes this loss as
“unrealized” and “notional” without verifying whether the loss relates to
actual foreign currency liabilities. As per the applicable International
Accounting Standards (IAS 21), foreign exchange losses on capital and revenue
accounts are recognized based on whether they are realized or not. The notice does not examine the nature of the
foreign exchange exposure, making the assertion
unsubstantiated. Without such scrutiny, the disallowance cannot be sustained.
8.
Unabsorbed Depreciation – Rs. 37,381,748,572
7.4.8 The Tribunal notes that the show cause notice
claims the disallowance of carried-forward depreciation due to legislative
amendments made between Tax Years 2011 to 2020. However, no specific statutory provision or
Finance Act reference is mentioned, nor is there an analysis of
how these amendments specifically bar such claims for the taxpayer in the
relevant year. Therefore, this appears to be a conclusory statement without legal grounding.
9.
Refund Adjustment – Rs. 666,569,446
7.4.9 It is alleged that the taxpayer has adjusted
refunds that do not exist on record. This could have been easily verified
through the FBR’s own centralized database. The notice does not annex any
report from the refund module or explain what enquiry was conducted to
ascertain the claim. The Tribunal finds that the onus was on the Department to verify and present
refund status, and in the absence of such verification, the
observation remains speculative.
10. Tax Credit under Section 148 – Rs.
1,792,412,295
7.4.10 The Department argues that the taxpayer
is not an industrial undertaking and thus cannot claim a tax credit under
section 148. However, the notice does not define the criteria used or refer to
section 2(29C) of the Ordinance or any factual analysis of the taxpayer’s
operational profile. The Tribunal observes that such a determination requires an evaluative enquiry,
which is clearly missing from the record. A blanket denial of status without enquiry
cannot form the basis for reassessment under section 122(5A).
7.5 In view of the above, it is evident that the jurisdiction assumed by the learned Additional
Commissioner Inland Revenue (Addl. CIR) to amend the deemed assessment under
Section 120 was not based on concrete or conclusive evidence, but rather on
presumptions and preliminary observations drawn solely from a perusal of the
return and annexed audited accounts. Section 122(5A) of the Ordinance empowers
the Commissioner to amend an assessment order if it is found to be erroneous in
so far as it is prejudicial to the interest of revenue. However, this power is
not unfettered. The provision requires that such an opinion must be formed on
the basis of objective material or evidence, not mere suspicion or the desire
to seek further clarification. In this case, the issues raised in the show
cause notice are evidently based on matters that warrant further factual
investigation and the collection of supporting documents, actions that fall
squarely within the domain of an audit under Section 177 rather than the
amendment procedure under Section 122(5A).
7.6 Furthermore, Section 122(9)
mandates that before making any amendment under Section 122, the taxpayer must
be confronted with specific material or information that forms the basis of the
proposed amendment. A review of the notice shows that such material evidence
was not confronted. Instead, the Addl. CIR merely raised queries and sought
explanations that indicate the initiation of a roving or fishing enquiry,
rather than a specific, evidence-backed amendment process. The Hon'ble superior
courts have consistently held that fishing inquiries are not permissible under
the garb of Section 122(5A). If the assessing authority deems that the return
may contain discrepancies or misstatements that can only be confirmed through
examination of the underlying records, the proper and lawful course is to
initiate an audit under Section 177. Only after the completion of such an
audit, and upon finding discrepancies based on audit findings, can the
assessing officer invoke the powers under Section 122(1), subject to the conditions
laid down therein.
7.7 In the present case, it is
abundantly clear that the assessing authority did not possess any concrete
evidence at the time of assuming jurisdiction under Section 122(5A). The
purpose of the notice was exploratory in nature, seeking information to
possibly justify an amendment, rather than amending an assessment on the basis
of already-available, verifiable evidence. This approach is not in conformity
with the law and amounts to a jurisdictional defect.
Therefore, in view of the foregoing and the provisions of Sections
122(5A) and 177 of the Ordinance, it is held that:
i.
The jurisdiction assumed
under Section 122(5A) was premature and unlawful, as it was not based on any established
error or prejudice to revenue supported by conclusive evidence;
- The approach adopted amounts to a fishing and
roving enquiry, which is impermissible under the law;
- The only legal recourse available to the
Assessing Officer was to select the case for audit under Section 177,
conduct a comprehensive examination of the accounts, and then proceed in
accordance with law based on actual findings;
- Consequently, the show cause notice issued
under section 122(5A) and the subsequent passing of the amended order is
illegal and without legal sanction. Accordingly,
the answer to the question is in the affirmative in favour of the
taxpayer.
8. Before
proceeding to address Question No. (iii), it is appropriate to reiterate the
brief facts of the case for better understanding.
8.1 Facts of the Case:
The taxpayer filed its return of income on 30.09.2021.
Subsequently, without issuing a deficiency notice under Section 120(3), the
Commissioner proceeded to issue a show cause notice under Section 122(5A)
on 19.11.2021. The notice inter alia alleged non-compliance with
Rule 12 of the Income Tax Rules, 2002, and called upon the taxpayer to explain
why depreciation and amortization expenses should not be disallowed.
8.2 Question No.(iii)
Upon
the filing of a return under Section 114 of the Ordinance, can the Commissioner
immediately initiate amendment proceedings under Section 122, or must the
Commissioner first determine whether the return is complete and has been
validly treated as assessed under Section 120, particularly in light of Section
120(6), which provides that an incomplete return shall be treated as complete
after the expiry of a specified period?
8.3
Findings:
I.
Interpretation of Section 120
Under
the statutory framework of the Ordinance, the Commissioner of Inland Revenue is
not legally empowered to initiate amendment proceedings under Section 122
immediately upon the filing of a return by a taxpayer under Section 114. The
reason lies in the conditional nature of what constitutes a valid “assessment”
under Section 120. Section 122 allows the Commissioner to amend an assessment, but
this authority presupposes the existence of a valid and legally recognized
assessment order. Therefore, before exercising powers under Section 122, it is
essential that an assessment exists in the eyes of the law.
Section
120(1) provides that a return filed by the taxpayer is treated as an assessment
made by the Commissioner on the date of its filing. However, this deemed
assessment is subject to the return being complete in all respects. Section 120(2)
further empowers the Commissioner to examine the return to determine whether it
is complete and has been filed in accordance with the provisions of the
Ordinance. If the return is found to be incomplete—for instance, due to missing
prescribed documents or failure to submit a required wealth statement—it is not to be treated as assessed
under Section 120(1) until those deficiencies are resolved.
This
is where Section 120(6)
plays a critical role in the assessment mechanism. It provides that if a return
filed by a taxpayer is found to be incomplete, the
Commissioner is required to first notify the taxpayer of the deficiency and
allow an opportunity to rectify it within the prescribed time,
typically thirty
days. If the taxpayer fails to remove the deficiency within the
specified period, the
return may be treated
as invalid.
However, if the Commissioner does not issue a notice
pointing out the deficiency within the prescribed time, the return shall be treated as complete by operation of law
upon the expiry of that period. Consequently, the return shall be deemed to be an assessment order
under Section 120(1),
even if the deficiencies have not been addressed by the taxpayer.
Therefore,
it logically follows that until a return is either (a) found to be complete by
the Commissioner, or (b) deemed complete under Section 120(6), there is no assessment in existence
which could be subject to amendment under Section 122. To proceed under Section
122 in the absence of a valid assessment would be legally untenable and
procedurally premature. The law clearly intends for the return to first cross
the threshold of completeness and deemed assessment under Section 120 before
the amendment mechanism in Section 122 can be validly invoked.
Furthermore,
superior courts have repeatedly emphasized the importance of procedural
regularity and legislative intent in tax matters. The deemed assessment regime
under Section 120 is designed to ensure efficiency and taxpayer convenience,
but it also sets specific procedural preconditions. The Commissioner must
follow those preconditions and cannot override or ignore the structure laid out
by the statute, including the waiting period stipulated in Section 120(6).
In
conclusion, the Commissioner cannot
lawfully proceed immediately under Section 122 upon the filing
of a return. He must first ensure that the return is either (i) complete in fact and
therefore deemed assessed under Section 120(1), or (ii) deemed complete under
Section 120(6) after the lapse of the prescribed period. Only after a return
reaches the status of a valid assessment can the amendment provisions of
Section 122 be triggered. Any action taken prior to that point would be
procedurally flawed and susceptible to legal challenge.
II. The record reflects that no
notice under Section 120(3) was issued by the Commissioner to determine the
completeness of the return within the statutory 180-day period in the instant
case. Instead, a notice under Section 122(5A) was issued on 19.11.2021,
well within the 180-day period provided for determining completeness.
III. The invocation of Section
122(5A) presupposes the existence of a valid assessment order, which may be
deemed under Section 120(1) only if the return filed is complete.
IV. Where the Commissioner has
doubts about the completeness of the return or compliance with procedural rules
such as Rule 12, the appropriate legal course is to first issue a
deficiency notice under Section 120(3). Only upon compliance (or
non-compliance) with such notice does the return attain the status of a valid
deemed assessment capable of being amended under Section 122.
V. By passing this legal
requirement and proceeding directly under Section 122(5A), the Commissioner
prematurely assumed jurisdiction, which is not sustainable under the law and barred by the doctrine of ripeness. Section
122 of the Ordinance empowers the Commissioner to amend an existing
assessment order. Whether such an order is explicitly issued under Section
120(1) of the Ordinance or is deemed to have been issued under the same
provision, the existence of an assessment order is a jurisdictional
prerequisite for the invocation of Section 122 of the Ordinance, including
under its sub-section (5A).
VI. The basic rationale behind the “Ripeness”
doctrine is to “prevent the courts
through avoidance of premature adjudication, from entangling themselves, in
abstract disagreements over administrative policies and also to protect the
agencies from judicial interference until an administrative decision has been
formalized and its effects felt in a concrete way by the challenging parties.” Reliance
is placed on the case of Mughal-E-Azam Banquet Complex v. Federation
of Pakistan,
(2011 PTD 2260). Applying
the above ratio decidendi to the
instant case, an assessment order cannot be amended under section 122(5A)
unless it qualifies as a deemed assessment order issued by the Commissioner by
way of legal fiction under section 120(1) of the Ordinance.
VII. The doctrine of “Ripeness” is a double-edged sword. It is not attracted merely
against the taxpayer for instance, where he assails the tax proceedings at a
premature stage where no adverse order is in the field but also against the
department, where an order is passed prematurely, before the fulfillment of
legal triggers and contours. After all, an assessment can only be amended
against a deemed assessment order, not something which is yet to fulfill the
requirements prescribed in the statute for the assumption of a legal fiction.
In view
of the above, issue No. (iii) is also answered in the negative, in favour of
the appellant taxpayer and against the department.
9. Whole-Text Canon
Question
No. (IV)
Whether the taxpayer’s right to revise under Section 114(6) of the Ordinance
can be rendered ineffective by premature departmental action?
9.1 As stated above the taxpayer
filed its return of income on 30.09.2021. Subsequently, without
issuing a deficiency notice under Section 120(3), the Commissioner proceeded to
issue a show cause notice under Section 122(5A) on 19.11.2021.
9.2 A somewhat similar question
came before the Hon’ble Lahore High Court, Lahore in the case titled M/s
Al-Qadir Seed Corporation (Pvt) Ltd. through its Director Versus Federation of
Pakistan, through Secretary Revenue Division, etc.
(Writ Petition No.81167 of 2024 order dated
17.03.2025). The Court held that the
issuance of an audit notice under Section 177(1) of the Income Tax Ordinance,
2001, within the 60-day statutory period allowed under Section 114(6) for
revising a return, is unlawful as it undermines the taxpayer's substantive
right to revise the return without penalty or prior approval. The Court
emphasized that:
i.
Section 114(6) is a
substantive provision granting taxpayers a statutory right to correct omissions
or errors within 60 days of filing a return.
ii.
Initiating audit
proceedings under Section 177 within that 60-day window disrupts the balance
between voluntary compliance and tax enforcement, and renders Section 114(6)
redundant, which is not permissible under settled principles of statutory
interpretation.
iii.
The Court declared the
audit notices issued before the expiry of 60 days as without lawful authority
and set them aside while leaving the door open for the taxpayer to seek the Commissioner’s
approval for late revision if so advised.
In essence, a taxpayer must be allowed the full 60-day period to revise
a return, and any enforcement action (such as an audit) that preempts this
right is legally invalid.
9.3 Further a combined
reading of Sections 114(6), 120(6), and 122(5A) of the Ordinance leads to an
inescapable conclusion that the law grants the taxpayer:
i.
A 60-day statutory right to revise the return
voluntarily under Section 114(6) of the Ordinance; and
ii.
A 180-day “silence period” where the return is to
be either accepted or acted upon under Section 120 of the Ordinance.
If the
Commissioner is allowed to initiate proceedings under Section 122(5A) during
this protected window, i.e. before the return becomes a deemed assessment, it
would render these statutory protections illusory and attribute redundancy to
the same.
9.4. There is an elementary
canon of statutory interpretation that a statute must be read as a whole, referred
to as the Whole-Text Canon in the
famous treatise of Antonin Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts (Minnesota: Thomson
West, 2012), at 167, also applied by his lordship Mr. Shahid Karim J in Iqbal & Sons v. Federation of
Pakistan, (2017 PTD 590). An extension of this is also found
in the Surplusage Canon, which
requires giving effect to each and every word of the statute. See Antonin
Scalia & Bryan A. Garner, Reading Law: The Interpretation of Legal Texts (Minnesota: Thomson West, 2012), at
174; Kanga & Palkhivala, The Law and Practice of Income Tax (Lexis
Nexis: 2020), Eleventh Edn., at 20. Similarly, the specific terms used in the
statute should be interpreted as defined within it, and redundancy cannot be
attributed to these terms. Reliance is placed on Searle IV v. Federation of Pakistan, 2018 SCMR 1444,
para 15 at 1465.
9.5. It is also a well-recognized principle of
administrative and tax law that no statutory power of amendment can be
exercised in a vacuum, or in anticipation of an event not yet materialized.
This principle has been upheld in multiple judgments, including CIT v.
Fahad Amin, 2002 PTD 248,
where courts have emphasized that jurisdictional powers must be exercised
strictly in accordance with statutory triggers and within their temporal and
procedural confines. The assumption of jurisdiction in a matter where the
mandatory pre-conditions for its exercise are incomplete, it renders such
assumption of jurisdiction as wrongful, hence, without lawful authority.
Reliance is placed on Dalda Foods
v. Competition Commission of Pakistan, 2022 CLD 10 [Islamabad]; Mandviwalla Builders and Developers v. M.
Awais Sheikh CEO Mangla View
Resort, 2023 CLD 885 [Lahore]. As aptly stated by the Supreme Court
of Pakistan in the case of MCB v.
Punjab Labour Appellate Tribunal, 2025 SCMR 303; if a mandatory condition for the exercise of
jurisdiction by a court is not fulfilled, then the entire proceeding which
follows becomes illegal, and suffers from want of jurisdiction.”
In view
of the above, the question No. (IV) is answered in the affirmative, in favour
of the taxpayer, and against the department.
10. Question No. (V)
Whether the instant proceedings conflict with the principles of
legitimate expectation of the taxpayer and procedural fairness?
10.1 The doctrine of legitimate expectation
also applies in this context. Where the law affords a taxpayer a defined period
to act (such as to revise or amend a return), the taxpayer has a reasonable
expectation that this period will be allowed to run without premature
departmental intervention.
10.2 Issuing a notice under Section 122(5A) of the
Ordinance before the taxpayer’s return is complete under Section 120(6) of the
Ordinance or the expiry of 60 days for filing of revised return under Section
114(6) not only offends procedural fairness but also places the taxpayer at a procedural
disadvantage, foreclosing voluntary compliance and undermining the very
scheme the Ordinance envisions for cooperative tax assessment. It is therefore
the considered opinion of the Tribunal that the impugned notice was issued
prematurely, without jurisdiction, and in disregard of the procedural and
substantive rights of the taxpayer under the Ordinance.
10.3 It is settled law that
if the proceedings are void ab-initio
the superstructure built thereon in the shape of the impugned order
automatically falls to the ground. Reliance may be placed on the judgment
titled Moulana Atta Ur Rehman v.
Al-Hajj Sardar Umer Farooq and others, (PLD 2008 SC 663) wherein it was held that:-
“In the same string are the
cases reported as Rehmatullah and others v. Saleh Khan and others (2007 SCMR
729), Punjab Workers' Welfare Board Government of Punjab and Human Resources
Department, Lahore v. Mehr Din (2007 SCMR 13), Muhammad Tariq Khan v Khawaja
Muhammad Jawad Asami (2007 SCMR 818) and All Pakistan Newspapers Society v.
Federation of Pakistan and others (PLD 2004 SC 600). The learned High Court has
not appreciated the law laid down in the above-reported cases. It is well settled that when the basic
order is without lawful authority and void ab initio, then the entire
superstructure raised thereon falls to the ground automatically as held in
Yousaf Ali v. Muhammad Aslam Zia (PLD 1958 SC 104)”. (Emphasis
supplied)
In
view of the above, the issue No. (V) is answered in the affirmative, in favour
of the taxpayer, and against the department.
Conclusion
11. In
view of the foregoing discussion, it is hereby declared that the proceedings
initiated by the assessing officer are void ab initio and without lawful
jurisdiction. Consequently, there is no necessity to address the grounds
pertaining to the merits of the case. Accordingly, the orders passed by the
lower authorities are annulled. However, it is clarified that the department
shall be at liberty to initiate fresh proceedings, strictly in accordance with
law and in light of the observations made herein.
-SD- (MUHAMMAD
NAEEM ASHRAF) MEMBER |
-SD- (M. M. AKRAM) JUDICIAL
MEMBER |
