APPELLATE TRIBUNAL INLAND REVENUE, DIVISION BENCH-I, ISLAMABAD
ITA No.245/IB/2020
(Tax
Year, 2018)
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Mr.
Abbas Hussain Mirza; House No.15, Street No.06, Fizaya Colony, Chaklala,
Rawalpindi. NTN:3740503816995 |
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Appellant |
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Vs
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Commissioner
Inland Revenue, Zone-AEOI, LTO, Islamabad. |
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Respondent |
Appellant By: Mr.
Zulqarnain Awan, Advocate
Respondent
BY: Mr.
Owais Khan, DR
Date of Hearing: 12.05.2026
Date of Order: 12.05.2026
ORDER
M.
M. AKRAM (Judicial Member):
The instant appeal has been filed by the
appellant-taxpayer against Order-in-Appeal No. 117/2019 dated November 19,
2019, passed by the learned Commissioner Inland Revenue (Appeals-I), Islamabad,
under section 129 of the Income Tax Ordinance, 2001 (“the Ordinance”),
pertaining to Tax Year 2018, on the grounds set forth in the memorandum of
appeal.
2. Briefly stated, the appellant-taxpayer filed a return of
income for the tax year 2018, declaring income from property at Rs.109,500 and
Pension at Rs.1,705,428, along with a wealth statement as on 30.06.2018
declaring total assets therein at Rs.11,420,576/-, and the deemed assessment
stood finalized under section 120(1) of the Ordinance as per the return. Later
on, information was received from external sources that the taxpayer had
immovable property in Dubai (UAE) and as per his tax record, the said property,
i.e. Apartment No.401, Building No.04, Al Arta Community (LLC) in Dubai UAE,
its rental income and Capital Gains earned on disposal of said apartment was
not declared in his tax returns for the relevant tax years. Accordingly, a
notice under section 176 was issued requiring the taxpayer to furnish the
information/documents related to the sources of investment, rental income and
capital gain from the disposal of the said property during the year 2008. In
response, the AR of the appellant attended the proceedings and submitted the
relevant documents related to the sources of investment, rental income and sale
proceeds of the immovable property in question. The assessing officer, after
having considered the relevant documents, accepted the explanation on the issue
of sources of investment and capital gain. However, the undeclared rental
income earned during 2005 to 2008, amounting to Rs.4,222,570/-, was added to
the taxpayer’s income under section 111(1)(d) read with section 111(2)(ii) of
the Ordinance, 2001.
3. Feeling aggrieved, the taxpayer preferred an appeal before
the learned Commissioner Inland Revenue (Appeals-I), who, vide Order-in-Appeal
dated November 19, 2019, upheld the order passed by the Assessing Officer.
Being dissatisfied with the said order, the taxpayer has filed the present
appeal before this Tribunal.
4. The appeal was fixed for hearing on May 12, 2026. On the said
date, the learned Authorized Representative (“AR”) appeared on behalf of
the appellant and advanced detailed arguments assailing the legality and
propriety of the impugned order. The learned AR, inter alia, contended that the
scope and operation of section 111 of the Income Tax Ordinance, 2001 (“the Ordinance”)
is confined only to those situations where the taxpayer fails to offer a
satisfactory explanation regarding the nature and source of any amount,
investment, expenditure, asset, or income discovered by the Department. It was
vehemently argued that section 111 does not create an independent charging
provision; rather, it merely provides a mechanism for bringing to tax amounts
which remain unexplained after affording the taxpayer an opportunity to
substantiate the source thereof. According to the learned AR, once the taxpayer
successfully establishes the nature, source, and character of the amount in
question to the satisfaction of the Commissioner, the foundational requirement
for the invocation of section 111 ceases to exist.
The
learned AR further submitted that, in the present case, the appellant had duly
furnished a complete explanation regarding the impugned foreign receipts,
including documentary evidence demonstrating that the amounts represented
rental income derived from overseas property as well as capital gains arising
from the sale of the subject property abroad. It was emphasised that the
Commissioner himself had accepted the explanation regarding the source and
nature of the receipts, and therefore, after such acceptance, the amount could
no longer legally be treated as “unexplained income” within the contemplation
of section 111 of the Ordinance. The learned AR maintained that once the true
nature and character of the receipts stood established, the same were required
to be assessed strictly in accordance with the relevant charging provisions
governing such income, namely, income from property chargeable under section 15
of the Ordinance, and not under the deeming fiction contained in section 111
read with section 39. It was accordingly argued that the Department could not
simultaneously accept the explanation regarding the source of income and yet
continue to sustain an addition under section 111.
5. On the other hand, the learned Departmental Representative
(“DR”), while supporting the findings recorded in the impugned order, argued
that the appellant had initially failed to disclose the foreign income in the
return of income and wealth statement, thereby attracting the mischief of
section 111 of the Ordinance. The learned DR contended that once concealed or
undisclosed foreign income comes to the notice of the Department during
assessment proceedings, the deeming provisions embodied in section 111 become
fully operative, and the amount is liable to be brought to tax under the said
provision. It was further argued that the subsequent explanation or disclosure
furnished by the taxpayer during the course of proceedings does not obliterate
the original default or concealment. According to the learned DR, the
unexplained foreign receipts, once detected by the Department, assume the
character of deemed income chargeable to tax under section 111 read with
section 39 of the Ordinance, irrespective of the taxpayer’s later attempt to
explain the source or nature thereof. The learned DR, therefore, prayed that
the impugned order passed by the learned Commissioner Inland Revenue (Appeals)
be maintained in its entirety as being fully in accordance with law and the
facts of the case.
6. Upon careful consideration of the facts of the case, the
impugned orders, and the rival contentions advanced by the learned
representatives of the parties, the following questions emerge for
determination by this Tribunal:
1. Whether
the rental income derived by the appellant from immovable property situated in
Dubai (UAE), which admittedly remained undisclosed in the return of income and
wealth statement, could validly be brought to tax under section 111(1)(d) of
the Income Tax Ordinance, 2001?
2. Whether
section 111 of the Ordinance constitutes an independent charging provision
authorising taxation of any undisclosed receipt irrespective of its established
nature and source, or whether it merely operates in cases where the taxpayer
fails to satisfactorily explain the nature and source of the amount in
question?
3. Whether,
after acceptance by the Department of the source, nature and character of the
foreign receipts as rental income arising from an identified immovable
property, the same could still legally retain the character of “unexplained
income” within the contemplation of section 111 of the Ordinance?
4. Whether
income admittedly falling under a specific head of income provided in the
Ordinance, namely “Income from Property” under section 15, can simultaneously
be subjected to tax under the deeming provisions of section 111 read with
section 39?
5. Whether
mere non-disclosure or concealment of foreign rental income in the original
return automatically attracts section 111, notwithstanding subsequent
explanation and substantiation furnished by the taxpayer during assessment
proceedings?
7. Question No.1
Whether
the undisclosed foreign rental income could validly be taxed under section
111(1)(d) of the Ordinance?
7.1 The controversy essentially revolves
around the true scope, intent, and legal operation of section 111 of the
Ordinance. For the facility of reference, it would be advantageous to briefly
advert to the legislative scheme underlying section 111. Section 111 empowers
the Commissioner to treat certain amounts as income chargeable to tax where the
taxpayer either offers no explanation regarding the nature and source thereof
or the explanation offered is found unsatisfactory. Thus, the jurisdictional
foundation for invoking section 111 rests upon the existence of an unexplained
amount, investment, expenditure, asset, or income.
7.2 The language employed in section 111
unmistakably demonstrates that the provision is evidentiary and deeming in
nature. It is not designed to create a separate species of taxable income
divorced from the ordinary charging provisions of the Ordinance. Rather, the
deeming fiction is intended only to bridge evidentiary gaps where the taxpayer
is unable to establish the lawful source or character of a receipt.
7.3 In the instant case, the record reveals
that the appellant furnished complete details relating to:
a. the
acquisition of the Dubai property;
b. the
sources of investment therein;
c. the
rental receipts earned therefrom; and
d. the
capital gains arising upon its disposal.
7.4 The Assessing Officer himself accepted the
explanation regarding the sources of investment as well as the capital gain.
More importantly, the Department also accepted that the impugned amount
represented rental income earned from the identified immovable property
situated in Dubai. Once the Department accepted the true nature and source of
the receipts, the very basis for the invocation of section 111 ceased to
survive. The receipts no longer remained “unexplained” within the meaning of
section 111(1)(d). At this juncture, it is imperative to observe that there
exists a marked distinction between:
a. an
unexplained amount; and
b. an
undisclosed amount.
Section
111 addresses the former, not necessarily the latter. Mere non-disclosure in
the return does not automatically transform an otherwise identifiable and
explained receipt into deemed income under section 111.
7.5 The august Supreme Court of Pakistan, in
numerous pronouncements, has consistently held that deeming provisions must
receive strict construction and cannot be expanded beyond their statutory
purpose. Reference may beneficially be made to the judgment titled Messrs Elahi Cotton Mills Ltd. v. Federation
of Pakistan (PLD 1997 SC 582), wherein
the Hon’ble Supreme Court held that a legal fiction must be confined strictly
to the purpose for which it is created and cannot be extended by implication. Similarly,
in CIT/WT, Sialkot Zone V. M/s Thapur (PVT), Sialkot (2002
PTD 2112), wherein the Hon’ble Lahore High Court reiterated that deeming
provisions in fiscal statutes are to be construed narrowly and strictly within
the four corners of their objects. The same principle has repeatedly been
followed by the superior courts, where the nature and source of a receipt stand
satisfactorily explained, section 111 loses applicability.
7.6 The Indian Courts, while interpreting
analogous provisions contained in sections 68, 69 and 69A of the Indian
Income-tax Act, 1961, have adopted a similar approach. In the case titled CIT v. Smt. P.K.
Noorjahan [237 ITR 570 (SC, India)], the
Hon’ble Supreme Court of India held that deeming provisions relating to
unexplained income cannot mechanically be invoked merely because an amount is
discovered; rather, the surrounding facts and satisfactory explanation
furnished by the assessee must be considered. Likewise, in the case titled Roshan Di Hatti v. CIT [(1977)
107 ITR 938 (SC)], it was
held that once the assessee satisfactorily explains the nature and source of
the amount, the deeming fiction ceases to operate.
Accordingly, we hold that the
foreign rental income in question, once identified and accepted as rental
income from a known foreign property, could not legally be brought to tax under
section 111(1)(d) of the Ordinance. The question is answered in the negative.
8. Question No.2
Whether
section 111 is an independent charging provision?
8.1 The learned Departmental Representative
argued that once concealed foreign income is discovered, section 111
automatically becomes operative regardless of the taxpayer’s subsequent
explanation. We are unable to subscribe to this proposition. Under the scheme
of the Ordinance, the charging provisions are principally contained in sections
9, 11, 12, 15, 18 and related provisions governing various heads of income.
Section 111 does not independently levy tax upon a distinct category of income.
Rather, it creates a rebuttable evidentiary presumption enabling the Department
to deem an unexplained amount as income chargeable to tax.
8.2 A careful reading of section 111
demonstrates that its application is conditional upon failure of explanation.
Therefore, a satisfactory explanation extinguishes the statutory presumption. The
Indian jurisprudence interpreting sections 68 and 69 also recognises that such
provisions are rules of evidence rather than standalone charging mechanisms. In
this regard, reliance may be placed on the judgment titled CIT v. Daulat Ram Rawatmull
[(1973) 87 ITR 349 (SC)], the
Indian Supreme Court held that deeming provisions cannot substitute proof where
the explanation stands substantiated through evidence.
Thus, section 111 cannot be
treated as an omnibus charging provision enabling taxation merely because an
income was omitted from disclosure. This question is answered accordingly.
9. Question No.3
Whether
the receipts could still retain the character of “unexplained income” after
acceptance of the explanation?
9.1 The answer, in our considered view, is
clearly in the negative. The Department accepted:
a. the
existence of the Dubai property;
b. the
source of investment therein;
c. the
ownership of the property;
d. the
sale proceeds; and
e. The
characterization of receipts as rental income.
Once these foundational facts
stood admitted, there remained no legal basis to categorise the receipts as
unexplained.
9.2 A receipt cannot simultaneously possess
two mutually destructive legal characters, namely:
a. explained
rental income; and
b. unexplained
deemed income.
The Department’s approach
effectively seeks to penalise concealment through section 111, whereas section
111 is not a penal provision. The Ordinance separately provides mechanisms for
addressing concealment, including amendment of assessment, penalties and
default surcharges.
9.3 If the Department’s interpretation is
accepted, every omitted item of income, even where fully explained, would
automatically become taxable under section 111, thereby rendering the entire
charging framework of the Ordinance redundant. Such an interpretation would
produce absurdity and therefore cannot be accepted. The settled canon of
interpretation is that fiscal statutes must be construed harmoniously so as to
give effect to all provisions without creating conflict. In this regard,
guidance may be drawn from the principles enunciated in Oil and Gas Development
Company Limited vs. Federal Board of Revenue and 2 others (2016 PTD
1675), Zaver Petroleum Corporation Limited Vs Federal Board of Revenue and
another (2016 PTD 2332), Dr Raja Aamer Zaman Vs Omer Ayub Khan and
others (2015 SCMR 1303), and Mst. Rooh Afza Vs Aurangzeb and others
(2015 SCMR 92), wherein it has been consistently held that statutory provisions
must be interpreted harmoniously, giving meaningful effect to each expression
and avoiding constructions that lead to redundancy or absurdity.
Accordingly, once the
receipts stood identified and explained, they ceased to fall within the ambit
of section 111.
10. Question No.4
Whether
rental income assessable under section 15 can simultaneously be taxed under
section 111, read with section 39?
10.1 The answer again is in the negative. The
Ordinance recognises distinct heads of income, each governed by its own
charging and computational provisions. Rental income from immovable property
squarely falls under section 15 dealing with “Income from Property.” Once a
receipt falls within a specific head of income, taxation must ordinarily
proceed under that specific provision rather than under a general deeming
provision, section 39 of the Ordinance. It is a settled principle of statutory
interpretation that “Specific provisions override general provisions.” This
principle has repeatedly been recognised in tax jurisprudence both in Pakistan
and India. In CIT, Zone-A, Lahore v. Sohaib Nisar (PTCL
2001 CL 405), it was held that in the presence of a specific provision of law
applicable to the situation, the Assessing Officer could not resort to any
other provision of law. Similar principles were affirmed in CIT v.
D.P. Sandu Bros. Chembur (P.) Ltd. [(2005) 273 ITR 1 (SC)] and in East
India Housing and Land Development Trust Ltd. v. CIT [1961] 42 ITR
49 (SC), wherein the Indian Supreme Court held that where income is
specifically covered by one charging provision, it cannot arbitrarily be
brought under another residuary or deeming provision.
10.2 Once the explanation was accepted, the
statutory fiction created by section 111 exhausted its purpose, and the income
necessarily reverted to its ordinary and intrinsic character under the charging
provisions of the Ordinance. At this stage, reference to section 15 becomes
material. Section 15 expressly provides that “The rent received or
receivable by a person for a tax year shall be chargeable to tax under the head
‘Income from Property.” The language employed by the legislature is
comprehensive and does not confine its operation to rent derived from property
situated in Pakistan only. No territorial restriction has been incorporated in
the provision. Accordingly, foreign rental income derived by a resident person
falls within the ambit of section 15, subject to the general principles
governing taxation of worldwide income under the Ordinance. It is also a
settled principle of fiscal jurisprudence that where a particular receipt
squarely falls within a specific head of income, resort cannot ordinarily be
made to a residuary head.
10.3 Section 39 relating to “Income from Other
Sources” is residuary in character and becomes applicable only where income
does not properly fall under any other specific head or is expressly deemed to
do so by law. In the instant matter, the receipt admittedly constitutes rental
income from immovable property. Therefore, once its nature and source are
accepted, the same cannot be artificially retained within the residuary
framework of section 39 merely because the information initially surfaced
during proceedings under section 111.
10.4 We are also unable to agree with the
proposition that section 111 permanently converts every discovered foreign
receipt into income assessable under the head “Other Sources” irrespective of
subsequent explanation. Such an interpretation would render redundant the
statutory words “offers no explanation” and “not adequately explained”. The
legislature has consciously conditioned the operation of section 111 upon the absence
of a satisfactory explanation. Acceptance of the explanation necessarily
displaces the deeming fiction.
10.5 At the same time, section 111(2)(ii) remains
relevant for determining the year in which discovered foreign-source income may
be brought to tax upon discovery by the Commissioner. However, the said
provision merely governs the timing or year of inclusion and does not alter the
essential character or statutory head of income.
Therefore, once the receipts
admittedly constituted rental income from property, they were liable, if at
all, to be assessed under section 15, subject to applicable limitation and
procedural provisions, and not under section 111.
11. Question No.5
Whether
mere concealment or non-disclosure automatically attracts section 111?
11.1 The Department’s argument essentially
equates concealment with unexplained income. Such an equation is legally
unsustainable. Concealment relates to failure of disclosure, whereas section
111 addresses failure of explanation. These are conceptually distinct legal
situations. Where the taxpayer establishes:
a. the
identity of the asset,
b. the
ownership thereof,
c. the
source of investment, and
d. the
nature of income,
The omission to disclose may
justify separate proceedings for amendment, penalty or default consequences,
but cannot by itself justify recourse to section 111.
11.2 The legislature consciously employed the
expression “unexplained” in section 111. Courts cannot substitute this
expression with “undisclosed.” Reference may also be made to the principle laid
down in the case titled Cape Brandy
Syndicate v. IRC (1921
1 KB 64), which has consistently been followed in tax jurisprudence,
namely that in a taxing statute nothing is to be implied and one has to look
merely at what is clearly said.
Accordingly, mere
non-disclosure of foreign rental income did not automatically justify addition
under section 111 once the taxpayer satisfactorily explained the nature and
source thereof.
12. Conclusion
12.1 For the foregoing reasons, we are of the
considered opinion that the authorities below misdirected themselves both on
facts and law in sustaining the addition under section 111(1)(d) of the
Ordinance despite having accepted the nature and source of the impugned
receipts as rental income derived from identified immovable property situated
abroad.
12.2 Once the explanation furnished by the
appellant regarding the foreign property, rental receipts, and related
transactions was accepted, the jurisdictional foundation necessary for the invocation
of section 111 ceased to exist. The impugned receipts could not legally be
treated as unexplained income merely because they were not originally disclosed
in the return of income.
12.3 Consequently, the addition of Rs.4,222,570
made under section 111(1)(d) read with section 111(2)(ii) of the Ordinance is
not sustainable in the eyes of law and is hereby deleted.
12.4 Foreign rental income, once identified and
accepted as rent arising from property, squarely falls within section 15 of the
Ordinance under the head “Income from Property”. Section 39, being residuary in
nature, cannot override a specific charging head expressly applicable to the
receipt in question; and section 111(2)(ii) may regulate the year of taxability
upon discovery of foreign-source income, but does not alter the substantive
head under which such income is assessable.
Consequently, the appeal
preferred by the appellant-taxpayer is hereby allowed, and the addition
impugned before this Tribunal stands deleted. Any amount recovered or realised
from the appellant during the pendency of the assessment and appellate
proceedings shall be refunded forthwith in accordance with law.
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Sd/- (M. M. AKRAM) JUDICIAL MEMBER |
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Sd/- (SHARIF UD DIN
KHILJI) MEMBER |
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