APPELLATE
TRIBUNAL INLAND REVENUE,
DIVISION
BENCH-I, ISLAMABAD
ITA No.1272/IB/2026
(Tax year 2020)
ITA No.1273/IB/2026
(Tax year 2021)
ITA No.1274/IB/2026
(Tax year 2022)
ITA No.1275/IB/2026
(Tax year 2023)
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Mr Muhammad Sufian; House No.211, Jeewan City,
Phase-III, Sahiwal. NTN:3540174325090 |
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Appellant |
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Vs |
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CIR, Zone-I, RTO, Sargodha. |
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Respondent |
Appellant By: Syed
Nadeem Hassan, ITP
Respondent BY: Mr. M.
Waqas, Advocate LA/DR
Date of Hearing: 05.11.2026
Date of Order: 05.11.2026
ORDER
M. M. AKRAM (Judicial Member): These appeals
have been preferred by the appellant–taxpayer against the impugned Appeal Order
Nos. 3191, 3190, 3189 and 3188, all dated 12.06.2026, passed by the learned
Commissioner Inland Revenue (Appeals), RTO, Sargodha [hereinafter
referred to as the “learned
CIR(A)”], under section 129(1) of the Income Tax
Ordinance, 2001 [hereinafter referred to as the “Ordinance”], for Tax Years 2020, 2021, 2022 and 2023,
respectively. The appellant has assailed the impugned appellate orders on
various grounds set forth in the respective memoranda of appeal. Since common
questions of fact and law are involved in all these appeals, the same are being
disposed of through this consolidated order.
2. FACTS OF THE CASE:
2.1. Briefly
stated, the appellant is an individual taxpayer who filed returns of income for
Tax Years 2020 to 2023, declaring salary income of Rs.420,000/-, Rs.480,000/-
and Rs.540,000/- for Tax Years 2020, 2021 and 2022, respectively, along with
agricultural income of Rs.4,500,000/- for each of the said tax years, claimed
as exempt income. For Tax Year 2023, the appellant declared business income of
Rs.820,000/- and agricultural income of Rs.4,700,000/- as exempt income. The
returns so filed were treated as assessment orders under section 120(1)(b) of
the Ordinance.
2.2. Subsequently,
on the basis of an investigation report received from the Office of the
Additional Director-V, Faisalabad, vide letter No. C.No./125 dated 03.10.2024,
proceedings under section 111(1) of the Ordinance were initiated against the
appellant on 18.11.2024 and concluded on 30.01.2025. During the course of these
proceedings, the appellant was, inter alia, confronted with the alleged
fabrication of agricultural income amounting to Rs.4,500,000/- for each of the Tax
Years 2020 to 2022 and Rs.4,700,000/- for Tax Year 2023. In support of his
claim, the appellant furnished an agreement purportedly executed in respect of
the cultivation of agricultural land measuring 37 acres, 01 marla and 225
square feet, situated at Renala Khurd, District Okara, for a consideration of
Rs.23,680,000/-. The learned Assessing Officer, however, treated the said
agreement as fabricated and unreliable, primarily on the grounds that the
requisite mutation relating to the alleged tenancy/lease arrangement had not
been obtained from the Land Revenue Department and that the stamp duty paid on
the agreement was inadequate in view of the consideration involved.
2.3. The
appellant was further required to furnish the relevant mutation, ownership
record (Fard-e-Malkiat), Jharpaidawar, Khasra Girdawari and agricultural income
tax returns for the relevant period. According to the learned Assessing
Officer, neither the appellant nor the alleged landowner furnished the
requisite documentary evidence to establish ownership, lawful tenancy or actual
cultivation of the land in question. It was also observed that, notwithstanding
the alleged commencement of agricultural activities on 01.07.2019, the
appellant was employed in another city, which, according to the learned
Assessing Officer, further cast doubt upon the genuineness of the agricultural
income declared for the relevant tax years. The learned Assessing Officer also
noted that the appellant had paid provincial agricultural income tax amounting
to Rs.273,000/- against an alleged federal tax liability of Rs.2,249,000/-,
resulting in a differential amount of Rs.1,976,000/-. On these premises, the
explanation furnished by the appellant was rejected, and the declared
agricultural income was treated as fictitious, allegedly introduced to
reconcile the appellant's wealth position and evade the incidence of taxation.
2.4. The
learned Assessing Officer also treated the appellant's declared wealth
amounting to Rs.8,940,000/-, comprising cash in hand/bank, receivables and
prize bonds, as unexplained, observing that the appellant had failed to furnish
the requisite particulars, bifurcation and supporting documentary evidence
regarding the nature and sources thereof. Thereafter, proceedings under section
122(9), read with section 122(5) of the Ordinance, were initiated on
31.01.2025. Through the show-cause notice, the appellant was once again
required to substantiate the agricultural income of Rs.4,500,000/- and explain
the sources of the assets declared in the wealth statement, particularly the
amount of Rs.4,500,000/- reflected as opening net assets.
2.5. The
learned Assessing Officer further referred to the appellant's business profile,
which reflected three business concerns, namely, Levian, Muhammad Sufian
Commission Agent and Delta Solutions, without disclosing any agricultural
activity. The replies furnished by the appellant were considered unsatisfactory
on the ground that no requisite documentary evidence had been produced and that
the appellant had merely contended that the Department was not competent to
question income falling within the provincial domain of agricultural taxation.
This contention was rejected by the learned Assessing Officer on the premise
that the controversy primarily concerned the actual derivation of the income
from agricultural activities. It was further observed that the appellant had
failed to explain the source and mode of payment of Rs.2,960,000/- allegedly
paid in advance on 01.07.2019 under the purported tenancy agreement.
2.6. Consequently,
the learned Assessing Officer treated the agricultural income of Rs.4,500,000/-
as unexplained income under section 111(1)(b) of the Ordinance, made a further
addition of Rs.2,960,000/- under section 111(1) on account of the alleged
unexplained advance payment, and treated the amount of Rs.4,500,000/- reflected
as cash in hand/bank, receivables and prize bonds/opening net assets as
unexplained. Accordingly, the assessment for Tax Year 2020 was amended under
section 122(1) of the Ordinance, determining the appellant's total taxable
income at Rs.12,380,000/- and tax payable at Rs.3,453,000/-, as against the
originally declared taxable income of Rs.420,000/-. Similar additions on
account of agricultural income and cash in hand/bank, receivables and prize
bonds, etc., were made for Tax Year 2021, whereas, for Tax Years 2022 and 2023,
additions were confined to the alleged unexplained agricultural income. The
respective amended assessment orders were passed on 26.03.2025.
2.7. Being
aggrieved by the aforesaid amended assessment orders, the appellant preferred
separate appeals before the learned CIR(A), who disposed of the same through
separate orders dated 12.06.2026. The learned CIR(A), after examining the
proceedings conducted under sections 111 and 122 of the Ordinance, held that
the proceedings had been lawfully initiated and concluded after providing
adequate opportunities of hearing to the appellant. In this regard, reliance
was placed upon the judgment of the Hon’ble Supreme Court of Pakistan reported
as Millat
Tractors Ltd. (2024 SCMR 700).
With
regard to the addition of agricultural income amounting to Rs.4,500,000/- for
Tax Years 2020 to 2022 and Rs.4,700,000/- for Tax Year 2023, the learned CIR(A)
observed that the appellant had failed to furnish admissible and credible
evidence establishing ownership or lawful acquisition of the agricultural land
or actual agricultural activities carried out thereon. The challan evidencing
payment of provincial agricultural income tax amounting to Rs.273,000/- on
05.12.2024, subsequent to the issuance of notice under section 111(1) of the
Ordinance, was considered insufficient, particularly in the absence of any
corroborative documentary evidence, and was consequently treated as an
afterthought. Accordingly, the addition on account of agricultural income was
upheld.
2.8. The
learned CIR(A) also upheld the addition of Rs.4,500,000/- on account of opening
net assets, holding that the appellant had failed to establish the existence
and source of the assets through supporting documentary evidence or any
verifiable trail. However, the addition of Rs.2,960,000/- relating to the
alleged investment made for acquiring agricultural land on Patta was deleted
for Tax Year 2020. The learned CIR(A) observed that, once the underlying
agricultural land transaction had itself been rejected by the Assessing Officer
as fabricated, the alleged investment in that very transaction could not
simultaneously be treated as an actual unexplained transaction warranting a
separate addition under section 111 of the Ordinance. Accordingly, the
assessment order for Tax Year 2020 was modified to this limited extent, whereas
the remaining amended assessment orders were maintained.
2.9. Still
aggrieved by the aforesaid appellate orders, the appellant has preferred the
instant appeals before this Tribunal, assailing the impugned orders on various
legal and factual grounds as set forth in the respective memoranda of appeal.
3. SUBMISSION OF
THE APPELLANT:
3.1. The
cases came up for hearing on 05.11.2026. The learned AR appearing on behalf of
the appellant contended that the initiation of proceedings under sections
111(1) and 122(9) of the Ordinance was unlawful, as the appellant's case had
neither been selected for audit nor was any definite information regarding
concealment of income available with the learned Officer Inland Revenue (OIR)
to justify the assumption of jurisdiction under section 122(1) of the
Ordinance. It was further argued that, despite repeated requests, the learned
OIR had failed to disclose the statutory authority or definite information
forming the basis of the proceedings, thereby rendering the entire exercise
coram non judice and void ab initio.
3.2. The
learned AR further alleged that the proceedings had been conducted in a mala
fide manner and in abuse of official authority, as the learned OIR repeatedly
requisitioned documents without identifying the relevant statutory authority
under which such requisitions were being made. It was also contended that the
written replies submitted by the appellant on 08.12.2024, 07.02.2025,
20.02.2025 and 10.03.2025 had not been properly considered or dealt with in the
impugned assessment order.
3.3. On
merits, the learned AR submitted that the agricultural income of Rs.4,500,000/-
declared by the appellant had been subjected to provincial agricultural income
tax and, being exempt under section 41 of the Ordinance, fell outside the
federal taxation domain. It was, therefore, argued that treating the said
income as unexplained income under section 111(1)(b) of the Ordinance was
contrary to the express provisions of law. In support of this contention, the
learned AR placed reliance upon the proviso to section 111(1) of the Ordinance
and the judicial precedents reported as 2023 PTD 312 and the judgment dated 02.03.2026 passed in ITR
No.51/2024, titled Commissioner
Inland Revenue v. Dr Abid Hussain.
3.4. The
learned AR further challenged the separate addition of Rs.4,500,000/-
representing the opening net assets brought forward from the preceding year,
contending that the same was legally unsustainable, particularly in the absence
of any independent finding establishing the nature and source of such assets as
unexplained income within the meaning of section 111(1) of the Ordinance. He
accordingly prayed for acceptance of the appeals and deletion of the impugned
additions. In support of his submissions, the learned AR also furnished
detailed written arguments in booklet form, which have been placed on record
and examined.
4. SUBMISSION
OF THE DEPARTMENT:
4.1. Conversely,
the learned Legal Advisor (LA), while controverting the submissions advanced on
behalf of the appellant–taxpayer, strongly supported the impugned appellate
orders and maintained that the same had been passed in accordance with the
relevant provisions of law and on the basis of the facts and material available
on record. He emphatically contended that the onus squarely rested upon the
appellant to substantiate the agricultural income declared in the returns of
income through cogent, credible and verifiable documentary evidence. According
to the learned LA/DR, mere declaration of agricultural income in the returns,
without furnishing adequate supporting evidence to establish its nature,
source, extent and actual receipt, could not be regarded as sufficient
discharge of the statutory burden cast upon the taxpayer.
4.2. The
learned DR further submitted that the agreement allegedly relied upon by the
appellant in support of the agricultural income had been found to be fabricated
and unreliable by the learned Assessing Officer. He pointed out that the
appellant had neither effectively challenged the authenticity or genuineness of
the said agreement before the learned CIR(A) nor brought any substantive
material on record before this Tribunal to rebut the findings recorded by the
Assessing Officer in this regard. According to the learned LA/DR, the
appellant's failure to controvert the allegation of fabrication concerning the
very document forming the foundation of his claim materially undermined the
credibility of the explanation furnished in respect of the agricultural income.
4.3. The
learned LA maintained that, in the absence of any effective challenge to the
genuineness of the agreement or the production of independent corroborative
evidence establishing the alleged agricultural activities and the income
purportedly derived therefrom, the said document could not be relied upon as a
valid basis for accepting the appellant's explanation.
4.4. The
learned LA also contended that the judicial precedents relied upon by the
learned AR were distinguishable on facts and had no direct application to the
controversy involved in the instant appeals. He submitted that the issue before
this Tribunal was not the general legal treatment of agricultural income or the
interpretation of any broader legal principle canvassed through the cited
judgments; rather, the controversy was confined to the factual question as to
whether the income declared by the appellant under the head of agricultural
income had been substantiated through credible and verifiable documentary
evidence.
4.5. He
emphasised that the appellant had failed to produce any documentary evidence
establishing ownership or possession of the agricultural land or demonstrating
any lawful arrangement or entitlement under which the alleged agricultural
activities could have been undertaken, and income generated therefrom. He
further reiterated that the only agreement relied upon by the appellant in
support of his claim had itself been found to be fabricated, and its
genuineness had neither been effectively challenged nor independently established
through any corroborative material. In these circumstances, the learned DR
argued that the judicial precedents cited by the learned AR, having been
rendered in materially different factual and legal contexts, could neither
advance the appellant's case nor dispense with the fundamental requirement of
substantiating the declared agricultural income. He, therefore, urged that the
reliance placed upon such judgments was misplaced and that the controversy was
required to be adjudicated strictly on the basis of the facts and evidentiary
material available on record.
4.6. The
learned DR further submitted that there was no cavil with the legal proposition
that agricultural income is exempt from taxation under section 41 of the
Ordinance and that the Revenue Department lacks jurisdiction to subject income
falling within the statutory definition of agricultural income to federal
income tax. However, he maintained that the benefit of such exemption could
only be extended where the very nature and character of the income as
agricultural income had first been established by the taxpayer through reliable
and verifiable evidence.
4.7. He
contended that the statutory exemption provided under section 41 of the
Ordinance could not be claimed merely by describing or declaring a particular
receipt as agricultural income in the return of income. Rather, the initial
burden rested upon the taxpayer to establish that the income in question had
actually been derived from agricultural activities and qualified as
agricultural income within the meaning of the Ordinance. According to the
learned DR, the exemption under section 41 could not, by itself, absolve the
taxpayer of the obligation to substantiate the nature and source of the income
for which exemption was being claimed.
4.8. The
learned DR further argued that, unless the appellant first established that the
income in question was, in fact, agricultural income, the question of extending
the statutory exemption under section 41 would not arise. A mere declaration of
income under the description of agricultural income, according to him, could
not automatically bring such income within the protective ambit of section 41
of the Ordinance, particularly when the appellant had failed to establish
ownership or possession of the agricultural land, the genuineness of the
alleged agreement or any other lawful arrangement for carrying out agricultural
activities, or the corresponding evidence of agricultural produce and resultant
income.
4.9. He,
therefore, maintained that the appellant could not claim the benefit of
exemption under section 41 of the Ordinance without first discharging the
evidentiary burden of establishing the essential character of the income as
agricultural income. Accordingly, he prayed that the contentions advanced on
behalf of the appellant, including reliance upon the cited judicial precedents,
be rejected and the impugned appellate orders be maintained.
4.10. In conclusion, the learned LA/DR reiterated that
the absence of satisfactory documentary substantiation, coupled with the
appellant's failure to effectively rebut the objection regarding the alleged
fabrication of the agreement, prima facie supported the conclusion that the
agreement was not genuine and that the agricultural income claimed on its basis
remained unsubstantiated. He accordingly submitted that the findings recorded
by the learned CIR(A) were justified, based on the material available on record
and did not warrant any interference by this Tribunal. He, therefore, prayed
that the appeals filed by the appellant–taxpayer be dismissed.
5. FINDINGS:
5.1. In
view of the pleadings, the submissions advanced by the learned representatives
of both parties and the material available on record, the following questions
arise for determination by this Tribunal:
i. Whether, in the facts and circumstances of
the case, the proceedings initiated under section 111(1), followed by
proceedings under sections 122(9) and 122(1) of the Income Tax Ordinance, 2001,
were without lawful authority, particularly in the absence of selection of the
appellant's case for audit, or whether the investigation report and the
material gathered therefrom constituted sufficient information to assume
jurisdiction under the relevant provisions of the Ordinance?
ii. Whether the appellant successfully
established the genuineness and actual derivation of agricultural income
amounting to Rs.4,500,000/- for Tax Years 2020 to 2022 and Rs.4,700,000/- for
Tax Year 2023, so as to qualify for exemption under section 41 of the
Ordinance, and whether the payment of provincial agricultural income tax
amounting to Rs.273,000/- attracted the proviso to section 111(1) to the extent
of agricultural income worked back therefrom?
iii. Whether the addition of Rs.4,500,000/-
representing opening net assets, comprising cash in hand/bank, receivables and
prize bonds, was lawfully treated as unexplained under section 111(1) of the
Ordinance in the absence of any satisfactory explanation regarding the nature,
existence and source thereof?
iv. Whether, in the facts and circumstances of
the case, the learned CIR(A) was justified in maintaining the amended
assessment orders, to the extent challenged before this Tribunal, and whether
the impugned appellate orders call for any interference?
5.2. We
have heard the learned representatives of both parties at considerable length,
examined the impugned appellate orders, the amended assessment orders, the
documentary material available on record and the written submissions furnished
by the learned AR in booklet form. We have also examined the relevant
provisions of the Ordinance and the judicial precedents cited by the learned
representatives. Our findings on the questions formulated above are as follows.
6. Question
No. 1:
Jurisdiction and
legality of proceedings under sections 111 and 122 of the Ordinance.
6.1. At
the outset, we consider it appropriate to examine the jurisdictional objection
raised by the learned AR that, in the absence of selection of the appellant's
case for audit, the learned OIR was not competent to initiate proceedings under
section 111(1), read with sections 122(9) and 122(1) of the Ordinance. We find
this contention to be misconceived and not borne out by the statutory scheme
governing amendment of assessments. A plain reading of section 122(5) of the
Ordinance reveals that the legislature has provided alternative sources through
which the jurisdiction to amend an assessment may be exercised, namely, an
audit or definite information, as applicable to the relevant statutory period.
The provision does not make selection of a taxpayer's case for audit an
indispensable precondition for assuming jurisdiction under section 122. The
expression employed by the legislature is disjunctive in nature and cannot be
interpreted to mean that an assessment can only be amended where the taxpayer
has first been selected for audit.
6.2. Furthermore, section 122(8) of the Ordinance
specifically explains the scope of definite information and encompasses
information concerning the acquisition, possession or disposal of money,
assets, valuable articles, investments and expenditure incurred by a taxpayer.
Accordingly, where information concerning unexplained assets, investments or
income comes to the knowledge of the Department through an investigation or any
other credible source, the competent authority is empowered to examine such
information in accordance with the prescribed statutory procedure.
6.3. In
the present case, the proceedings were not initiated merely on the basis of
suspicion, conjecture or an arbitrary exercise of authority. The Department
received an investigation report from the Office of the Additional Director-V,
Faisalabad, through letter No. C.No./125 dated 03.10.2024, which specifically
raised questions regarding the agricultural income declared by the appellant
and the corresponding wealth position reflected in the returns. The said
information constituted a legitimate basis for seeking an explanation under
section 111(1) of the Ordinance.
6.4. It is also significant that the Department
did not directly proceed to amend the deemed assessments without first
confronting the appellant with the information available on record. Rather,
proceedings under section 111(1) were initiated on 18.11.2024, requiring the
appellant to explain the nature and source of the agricultural income and the
relevant assets. The proceedings were concluded on 30.01.2025 after
consideration of the appellant's explanation. Thereafter, proceedings under
section 122(9), read with section 122(5), were initiated on 31.01.2025,
followed by the amended assessment orders dated 26.03.2025. Thus, the
chronology of events demonstrates that the Department followed the statutory
sequence of first examining the explanation under section 111(1) and thereafter
proceeding to amend the assessments under section 122 of the Ordinance.
6.5. In this regard, we find guidance from the
authoritative judgment of the Hon’ble Supreme Court of Pakistan in Commissioner Inland Revenue, Lahore v.
Messrs Millat Tractors Limited, Lahore and others (2024
SCMR 700). The Hon’ble Supreme Court examined the interrelationship between
sections 111 and 122 of the Ordinance and held that, before an assessment can
be amended under section 122 on the basis of section 111, the taxpayer must be
confronted with the relevant information, an explanation must be obtained, and
the proceedings under section 111 must culminate in an opinion of the
Commissioner. Such an opinion, where adverse to the taxpayer, constitutes
definite information for the purposes of section 122(5), subject to fulfilment
of the other statutory requirements. The Hon’ble Supreme Court further
explained that the proceedings under sections 111 and 122 are distinct and
cannot be amalgamated in a manner that deprives the taxpayer of the opportunity
contemplated under the law. The relevant observations of the Hon’ble Supreme
Court, particularly paragraphs 16 to 18 of the judgment, clearly establish that
the proceedings under section 111 must be concluded before the proceedings
under section 122 are formally given effect to. Applying the aforesaid
principle to the facts of the present case, we find that the Department
complied with the statutory sequence identified by the Hon’ble Supreme Court.
The proceedings under section 111 were initiated and concluded on 30.01.2025,
whereas the notice under section 122(9) was issued on 31.01.2025. Consequently,
no procedural infirmity of the nature contemplated in Millat Tractors Limited is
established from the chronology of the present proceedings.
6.6. We have also examined the appellant's
contention that the investigation report was not disclosed or that the
Department failed to identify the statutory authority for initiating the
proceedings. We find that the appellant was specifically confronted with the
allegations concerning the declared agricultural income, the purported tenancy
agreement, the absence of ownership and cultivation records and the unexplained
assets. The notices and subsequent proceedings clearly identified the matters
requiring explanation. The appellant was afforded opportunities to respond and
produced his explanation and supporting documents, which were duly considered
by the Department.
6.7. The fact that the explanation furnished by
the appellant was ultimately found unsatisfactory does not, by itself, render
the proceedings unlawful or establish mala fides on the part of the Department.
Similarly, disagreement with the conclusions drawn by the assessing authority
cannot be equated with an abuse of official authority. It is also relevant that
the appellant has not demonstrated any specific prejudice arising from the
alleged non-disclosure of the investigation material, particularly when the
substantive allegations forming the basis of the proceedings were communicated
to him, and an opportunity to rebut them was afforded.
6.8. The reliance placed upon Millat Tractors Limited
(2024 SCMR 700), therefore, does not advance the appellant's case. On the
contrary, the said judgment reinforces the requirement of compliance with the
statutory sequence, which, on the facts available before us, was duly observed
by the Department.
We,
accordingly, hold that the absence of selection for audit did not, in the
circumstances of the present case, deprive the competent authority of
jurisdiction to initiate proceedings on the basis of definite information
obtained through the investigation report. The proceedings under section 111(1)
having been concluded before the initiation of proceedings under section
122(9), the jurisdictional objection raised by the appellant is devoid of merit
and is hereby rejected.
7. Question No. 2:
Genuineness of
agricultural income and applicability of sections 41 and 111(1) of the
Ordinance.
7.1. The
principal controversy in these appeals concerns the agricultural income
declared by the appellant at Rs.4,500,000/- for each of the Tax Years 2020 to
2022 and Rs.4,700,000/- for Tax Year 2023. The appellant claims that the said
income is exempt under section 41 of the Ordinance and, therefore, could not
lawfully be treated as unexplained income under section 111(1)(b).
7.2. There can be no cavil with the legal
proposition that agricultural income, as defined under section 41(2) of the
Ordinance, is exempt from tax under the federal income tax law. Equally, there
is no controversy that the taxation of agricultural income falls within the
legislative domain of the provinces in terms of the constitutional distribution
of legislative powers. However, the exemption provided under section 41 does
not dispense with the requirement of establishing that a particular receipt or
amount actually possesses the essential character of agricultural income. In
other words, the question whether an amount constitutes agricultural income and
the question whether its nature and source have been satisfactorily explained
for the purposes of section 111(1) are distinct legal questions. The former
concerns the statutory character of the income, whereas the latter concerns the
evidentiary justification of the explanation furnished by the taxpayer
regarding the source of an amount, investment or asset.
7.3. Section 111(1) of the Ordinance empowers the
Commissioner to examine any unexplained amount credited in the books of
account, investment made, money or valuable article owned, expenditure incurred
or concealed income, where the taxpayer fails to explain the nature and source
thereof or furnishes an explanation which is not found satisfactory. The
relevant statutory proviso further provides that where a taxpayer explains the
nature and source of such amount, investment, money, valuable article or
expenditure by way of agricultural income, the explanation shall be accepted to
the extent of agricultural income worked back on the basis of agricultural
income tax paid under the relevant provincial law.
7.4. A combined reading of section 41 and the
proviso to section 111(1) makes it abundantly clear that the legislature has
neither conferred an unrestricted right upon a taxpayer to designate any
unexplained amount as agricultural income nor authorized the Revenue Department
to tax genuine agricultural income. The statutory scheme requires the taxpayer
to substantiate the explanation, while simultaneously protecting the amount of
agricultural income established in accordance with the prescribed statutory
mechanism.
7.5. The agreement produced by the appellant
before the assessing officer, purportedly executed for cultivation of
agricultural land measuring 37 acres, 01 marla and 225 square feet situated at
Renala Khurd, District Okara. The said agreement was the principal, rather the
only substantive document relied upon by the appellant to establish the alleged
agricultural arrangement and justify the substantial agricultural income
declared continuously over four tax years. However, the appellant failed to
furnish the relevant mutation or any authenticated record of tenancy or lease
from the Land Revenue Department. No ownership record (Fard-e-Malkiat), Khasra
Girdawari or other corresponding revenue record was produced to establish that
the appellant had actually acquired possession of the land or was legally
entitled to undertake cultivation thereon. Similarly, no satisfactory evidence
was furnished regarding the agricultural produce, the nature and extent of
cultivation, the yield obtained, the sale of produce or the actual receipt of
the income declared in the returns.
7.6. It is pertinent to observe that agricultural
income is not established merely by producing an agreement purporting to grant
tenancy or cultivation rights over a particular parcel of land. The existence
of an agricultural arrangement, its implementation and the actual derivation of
income therefrom are separate factual matters requiring appropriate
substantiation. An agreement, even if executed, may establish an alleged
contractual arrangement; however, it does not, by itself, establish that
agricultural operations were actually undertaken or that the substantial income
declared by the taxpayer was generated therefrom.
7.7. We further find that the genuineness of the
agreement itself remained seriously questionable. The learned Assessing Officer
recorded specific findings regarding its authenticity, including the absence of
the requisite mutation and the inadequacy of the stamp duty paid in relation to
the consideration of Rs.23,680,000/- reflected therein. The appellant has not
produced any independent documentary material before this Tribunal capable of
satisfactorily rebutting these findings. Although the learned AR has generally
challenged the conclusions of the assessing authority, no convincing
explanation has been furnished as to why the relevant revenue record, proof of
possession, cultivation particulars and other contemporaneous documents were
not produced when specifically requisitioned. Nor has any satisfactory
explanation been offered as to how the appellant, while being employed in
another city, managed the alleged cultivation of such a substantial area of
agricultural land and generated agricultural income of Rs.4,500,000/- to
Rs.4,700,000/- annually.
7.8. We are conscious that employment in another
city, by itself, does not preclude a person from deriving agricultural income
through tenants, managers or other lawful arrangements. Nevertheless, in the
present case, the appellant has failed to establish any such arrangement
through reliable evidence. The employment circumstance, therefore, assumes
relevance only when considered cumulatively with the absence of ownership,
tenancy, possession and cultivation records.
7.9. Another significant aspect requiring
consideration is the appellant's business profile, which reflected three
business concerns, namely, Levian, Muhammad Sufian Commission Agent and Delta
Solutions, without disclosing any corresponding agricultural activity. Although
the mere existence of business concerns does not disqualify an individual from
deriving agricultural income, the appellant was required to substantiate his
claim through independent and verifiable evidence. The absence of any
supporting agricultural record, particularly in the face of specific queries
raised by the Department, materially weakens the explanation furnished by him. We
are, therefore, unable to accept that the appellant discharged the initial
evidentiary burden merely by declaring agricultural income in his returns and
producing an agreement whose genuineness and implementation remained
unestablished.
7.10. We now turn to the
provincial agricultural income tax payment of Rs.273,000/- allegedly made by
the appellant through a challan dated 05.12.2024. The learned AR has placed
considerable reliance upon the proviso to section 111(1) of the Ordinance,
contending that the appellant's explanation, being based upon agricultural
income, is required to be accepted to the extent of agricultural income worked
back on the basis of provincial agricultural income tax paid under the relevant
provincial law. We are conscious of the mandatory expression employed by the
legislature in the said proviso. There can be no cavil with the proposition
that, where its statutory conditions are attracted, the explanation furnished
by a taxpayer by way of agricultural income must be accepted to the extent
expressly prescribed therein. However, the application of the proviso
necessarily requires examination of whether the taxpayer has, in fact,
explained the nature and source of the amount in question by way of
agricultural income and whether the payment relied upon represents agricultural
income tax paid under the relevant provincial law in respect of the income
sought to be explained. The proviso cannot be read in isolation from the
substantive requirements of section 111(1), nor can a mere assertion in a
return of income, without a demonstrable factual foundation, be treated as
conclusive proof of the nature and source of an amount otherwise falling within
the scope of the said provision.
7.11. It is important to
distinguish between a genuine claim of agricultural income supported by a
provincial tax payment and a bare declaration of agricultural income made to
explain an otherwise unexplained amount, investment or asset. The proviso does
not confer automatic or blanket immunity upon every amount described by a
taxpayer as agricultural income. Its operation is confined to the extent of
agricultural income that can lawfully be worked back from the agricultural
income tax actually paid under the relevant provincial law. For that purpose,
the identity of the taxpayer, the applicable provincial enactment, the relevant
tax period, the nature of the liability discharged, the particulars of the
agricultural holding and the statutory basis of computation assume material
significance. A challan, by itself, may establish that a payment was made; it
does not, without examination of its particulars and the applicable provincial
law, necessarily establish that the payment relates to the agricultural income
declared by the taxpayer for each of the tax years under consideration, or that
the entire amount claimed can be worked back from such payment.
7.12. In
the present case, the appellant declared agricultural income of Rs.4,500,000/-
for each of Tax Years 2020, 2021 and 2022, and Rs.4,700,000/- for Tax Year
2023. In support thereof, he relied upon an alleged agricultural arrangement
concerning land measuring 37 acres, 01 marla and 225 square feet, situated at
Renala Khurd, District Okara. However, the appellant failed to substantiate his
legal or factual connection with the said land through reliable ownership,
tenancy, lease, possession or other evidence demonstrating a lawful and genuine
arrangement for undertaking agricultural operations. The alleged agreement,
which constituted the principal foundation of his explanation, was itself found
unreliable, and its execution and implementation were not established through
independent evidence. No satisfactory revenue record, cultivation particulars,
crop or yield record, evidence of purchase of agricultural inputs, sale
proceeds or other verifiable material was produced to demonstrate that the
appellant had actually undertaken agricultural operations on the land in
question and derived the substantial income declared in the returns. We are not
laying down that ownership of agricultural land is an indispensable condition
for deriving agricultural income; such income may also arise through a genuine
tenancy or other lawful cultivation arrangement. The material consideration in
the present case, however, is that the appellant has failed to establish either
ownership or any credible alternative arrangement through which the alleged
agricultural activity could have been carried out.
7.13. In
these circumstances, the payment of Rs.273,000/- dated 05.12.2024 cannot be
examined in isolation from the factual foundation of the appellant's claim. The
appellant was required to establish that the payment was made under the
relevant provisions of the Punjab Agricultural Income Tax Act, 1997, or other
applicable provincial law, and that it related to his own agricultural holding
and the relevant period for which agricultural income was declared. He was also
required to furnish the provincial assessment, computation or other particulars
enabling the agricultural income to be worked back from the tax paid in
accordance with the applicable statutory mechanism. No satisfactory year-wise
reconciliation or reliable material establishing such nexus has been brought on
record. We, therefore, find that the appellant has not established that the
said payment represents agricultural income tax attributable to the
agricultural income declared by him for the four tax years in question, nor has
he demonstrated the amount of agricultural income, if any, that can be worked
back therefrom under the relevant provincial law. The mandatory proviso cannot
be invoked merely on the strength of an unexplained or uncorrelated payment challan,
divorced from the very agricultural source which the appellant seeks to
establish.
7.14. We
have considered the judgment of the Honourable Lahore High Court in Commissioner Inland Revenue v. M/s.
Tasneem Akhtar (2023 PTD 312). The legal proposition
enunciated therein, namely, that the proviso to section 111(1) is mandatory and
that the explanation is required to be accepted to the extent of agricultural
income worked back on the basis of agricultural income tax paid under the
relevant provincial law, is respectfully followed. The said judgment, however,
does not dispense with the requirement of examining whether the payment relied
upon is, in fact, a payment of agricultural income tax under the relevant
provincial law and whether the amount of agricultural income claimed can be
worked back therefrom. The factual context of that case is distinguishable
inasmuch as the provincial tax payment produced by the taxpayer was not
disputed by the Department, whereas, in the present case, the appellant has failed
to establish the necessary nexus between the solitary payment of Rs.273,000/-,
the alleged agricultural holding and the agricultural income declared
separately for four tax years. We emphasise that our conclusion is not founded
upon the mere fact that the payment was made after initiation of proceedings;
rather, it rests upon the appellant's failure to establish the nature,
statutory basis, relevant period and connection of the payment with the
agricultural income relied upon as the source of the amounts in question.
7.15. We
have also considered the judgment of the Honourable Balochistan High Court in Commissioner Inland Revenue, Zone-I,
Regional Tax Office, Quetta v. Khalid Hussain (2025 PTD 936).
The said judgment reiterates the mandatory nature of the proviso to section
111(1) and the requirement that proceedings under section 111 be duly concluded
before the subsequent exercise of jurisdiction under section 122. We
respectfully subscribe to these principles. Nevertheless, the said judgment
does not lay down that an unverified payment challan, without establishing its
statutory character and its relationship with the agricultural income claimed,
must result in acceptance of the entire amount declared by the taxpayer. The
appellant in the present case has failed to furnish the necessary material
enabling the Tribunal to determine the agricultural income, if any, that could
be worked back from the payment relied upon by him. The said judgment,
therefore, does not advance the appellant's case beyond the legal propositions
which we have already acknowledged and applied.
7.16. We
may clarify that the controversy before us is not whether agricultural income,
duly established as such within the meaning of section 41 of the Ordinance, can
be subjected to federal income tax. It plainly cannot. The question, rather, is
whether the appellant has established that the amounts declared by him as
agricultural income were, in fact, derived from agricultural operations and
whether the explanation furnished in respect of the relevant credits, money or
assets satisfies the requirements of section 111(1), including the proviso
thereto. The distinction between the existence of an exemption and the factual
establishment of the source claimed to fall within that exemption must be
maintained. A taxpayer cannot secure the benefit of section 41 merely by
assigning the description of agricultural income to an amount whose actual
source and derivation remain unsubstantiated.
7.17. The
proviso to section 111(1) is a statutory safeguard intended to ensure that a
genuine explanation based upon agricultural income is accepted to the extent of
the agricultural income worked back from provincial agricultural income tax
paid under the relevant provincial law. It is neither an unrestricted deeming
provision validating every declaration of agricultural income nor a bar against
lawful inquiry into the nature and source of an amount falling within section
111(1). The Department is competent to examine whether the explanation is
genuine, whether the alleged agricultural activity has any factual foundation,
and whether the payment relied upon satisfies the statutory requirements of the
proviso. Where the taxpayer fails to establish the claimed agricultural source
and also fails to establish the statutory nexus and computation of the
provincial tax payment, the proviso cannot be invoked as an automatic answer to
the proceedings under section 111(1).
In view of the foregoing discussion,
we find that the appellant has failed to establish the genuineness of the
alleged agricultural arrangement, his legal or factual entitlement to undertake
cultivation on the land in question, or the actual conduct of agricultural
operations resulting in the substantial income declared for the relevant tax
years. The alleged tenancy agreement has not been substantiated through
reliable independent evidence, and no credible material regarding cultivation,
production, yield or sale of agricultural produce has been brought on record.
Equally, the solitary payment of Rs.273,000/- has not been correlated with the
alleged agricultural holding or the agricultural income declared for the
respective tax years, nor has the appellant furnished the statutory computation
enabling the agricultural income to be worked back from the amount paid. We
are, therefore, not persuaded that the appellant has brought his case within
the factual and statutory requirements necessary to claim acceptance of the
explanation under the proviso to section 111(1). Our conclusion does not rest
upon the mere timing of the payment or upon any proposition that ownership of
land is indispensable for deriving agricultural income; it rests upon the
cumulative failure to establish a genuine agricultural source and the necessary
statutory nexus of the provincial tax payment. Consequently, the findings of
the learned CIR(A), confirming the additions on account of the unexplained
amounts claimed as agricultural income, are upheld.
8. Question
No. 3:
Addition on account of
opening net assets amounting to Rs.4,500,000/-.
8.1. The
next issue concerns the addition of Rs.4,500,000/- representing opening net
assets, comprising cash in hand/bank, receivables and prize bonds, which was
treated as unexplained by the learned Assessing Officer and subsequently
maintained by the learned CIR(A). We have examined the relevant wealth
particulars, the explanation furnished by the appellant and the findings
recorded by the authorities below. It is evident that the appellant had
declared assets aggregating to Rs.4,500,000/- in the wealth statement; however,
he failed to furnish satisfactory particulars, supporting documentary evidence
or a credible reconciliation establishing their actual existence, nature,
composition and source. Despite specific requisitions, no reliable explanation
was furnished to demonstrate the manner in which the said assets had been
acquired or accumulated.
8.2. A material feature of the
present case, which cannot be overlooked, is that the appellant has described
the amount of Rs.4,500,000/- as his opening net assets, yet no preceding return
of income or wealth statement has been brought on record to demonstrate that
the said assets had actually existed at the commencement of the relevant tax
year or had been accumulated in any identified preceding period. The
description of an amount as an "opening balance" is merely a label
adopted by the taxpayer and cannot, by itself, establish either the existence
of the assets on the relevant date or the year and source of their acquisition.
Where a taxpayer asserts that a substantial amount of cash, receivables or
prize bonds represents accumulated wealth brought forward from an earlier
period, it is incumbent upon him, once called upon under section 111(1), to
furnish a credible account of the origin, accumulation and continuity of such
assets. In the present case, the appellant has failed to furnish any
contemporaneous record, earlier wealth statement, bank trail, evidence of
receivables, prize bond particulars or other reliable material establishing
that the amount in question constituted genuine accumulated wealth existing
before the relevant tax year.
8.3. At
the outset, it is important to appreciate that the mere declaration of an asset
in a wealth statement does not, by itself, establish the genuineness of the
asset or satisfactorily explain the source of its acquisition. A wealth
statement is essentially a declaration furnished by the taxpayer and its
contents remain subject to verification and scrutiny by the taxation
authorities. In this regard, reliance is appropriately placed upon the judgment
of the Hon’ble Lahore High Court in Bilal Zaman v. Commissioner Inland
Revenue, RTO, Faisalabad, etc. (I.T.R. No. 2430 of 2021, order
dated 18.01.2021), wherein it was observed that there is no cavil that a wealth
statement is merely a declaration and cannot be treated as gospel truth for the
purposes of explaining income for subsequent years. The said principle
reinforces the proposition that a mere disclosure in a wealth statement does
not dispense with the taxpayer's obligation to substantiate the nature and
source of the assets when specifically called upon to do so.
8.4. The
above principle also finds support from the judgment of the Honourable Supreme
Court of Pakistan in Farrukh Shahzad v. Commissioner Inland Revenue
(Legal), RTO, Rawalpindi (2018 SCMR 1375), wherein the Hon’able
Supreme Court examined the scope and applicability of section 111(1)(b), read
with section 111(2), of the Ordinance. The Hon’able Supreme Court upheld the
addition made on account of unexplained accretion in wealth where the taxpayer
had failed to furnish satisfactory material explaining the nature and source of
the investment. The Court, inter alia, observed that the taxpayer had been allowed
to explain the accretion in his net wealth but had failed to refer to any
material capable of substantiating its source. Consequently, the addition was
sustained. The said judgment establishes that where a taxpayer fails to
substantiate the nature and source of an investment or accretion in wealth, the
taxation authorities are justified in invoking section 111(1)(b), subject to
fulfilment of the statutory conditions prescribed therein. The ratio of the
said judgment is directly relevant to the controversy before us, particularly
with regard to the evidentiary obligation of a taxpayer to substantiate the
source of assets disclosed in the wealth statement.
8.5. In
the present case, section 111(1)(b) of the Ordinance specifically encompasses a
situation where a person has made an investment or is the owner of money or a
valuable article and fails to offer an explanation regarding its nature and
source, or the explanation offered is not satisfactory. Accordingly, the
taxpayer is required not merely to disclose the assets in the wealth statement
but also to substantiate, through credible and verifiable material, the source
from which such assets were acquired or accumulated. The appellant, despite
having exclusive knowledge and access to the relevant particulars, failed to
furnish supporting evidence, documentary record or a satisfactory
reconciliation in respect of the declared cash, receivables and prize bonds.
The declaration, therefore, cannot, in the absence of supporting evidence, be
accepted as conclusive proof of the genuineness and explained source of the
assets.
8.6. We are conscious that section
111(2) of the Ordinance requires an amount falling within section 111(1) to be
included in the income of the tax year to which the relevant investment, money,
valuable article or expenditure relates. Accordingly, the mere description of
an amount as opening wealth does not, by itself, determine its taxability in
the relevant year. However, the converse is equally important: a taxpayer
cannot defeat a lawful inquiry into unexplained money or assets merely by
describing them as an opening balance, particularly where no preceding wealth
statement or contemporaneous evidence is available to establish their prior
existence and source. The appellant has not identified the period during which
the alleged cash, receivables and prize bonds were accumulated, the
transactions through which they came into existence, or the source from which they
were acquired. Nor has he furnished any reliable material showing that the
amount had been accumulated in a particular earlier tax year. His explanation
substantially rests upon the agricultural income declared in the subsequent
returns, which, for the reasons discussed above, has not been substantiated.
The mere use of the expression "opening net assets" cannot substitute
for the explanation of nature and source required by section 111(1). The
relevant year, however, must be determined in accordance with section 111(2) on
the basis of the actual date or period of acquisition or accumulation
established from the record.
8.7. It is further significant
that the appellant has not furnished any independent explanation for the source
of the assets in question. His principal explanation is that the amount
represents savings or accumulation out of agricultural income. However, the very
agricultural source relied upon by him has not been established through
reliable evidence of ownership, tenancy, cultivation, production or receipt of
agricultural proceeds. An explanation cannot acquire credibility merely by
being repeated in relation to different additions. Once the alleged source
remains unsubstantiated, the appellant cannot rely upon the same assertion,
without any independent supporting material, to explain the cash, receivables
and prize bonds declared as opening assets. The failure to establish the
alleged agricultural source is, therefore, relevant to the assessment of the
explanation furnished in respect of the opening assets as well.
8.8. We have also considered
whether the addition of Rs.4,500,000/- on account of opening assets results in
duplication of the amount separately added on account of the alleged
unexplained agricultural income. The two additions can be sustained
independently only to the extent that they represent distinct statutory subject
matter and separate unexplained amounts. The Department cannot tax the same
economic amount twice merely by describing it once as unexplained income and
again as an asset acquired out of that very income. The assessment must,
therefore, be read and applied in a manner that avoids double taxation of the
same underlying amount. The appellant, however, has not furnished a reliable
asset-wise reconciliation or any documentary material establishing that the
amount of Rs.4,500,000/- represents a duplication of an amount already
subjected to addition. Nevertheless, the impugned addition can only be
sustained to the extent that the relevant assets or money constitute a distinct
unexplained amount falling within section 111(1), with its year of taxability
determined in accordance with section 111(2).
8.9. In
view of the foregoing discussion, particularly the principles enunciated by the
Honourable Supreme Court in Farrukh Shahzad v. Commissioner Inland
Revenue (Legal), RTO, Rawalpindi (2018 SCMR 1375), and the
observations of the Hon’ble Lahore High Court in Bilal Zaman v.
Commissioner Inland Revenue, RTO, Faisalabad, etc. (I.T.R. No. 2430
of 2021, order dated 18.01.2021), we find that the appellant has failed to
discharge the evidentiary burden of satisfactorily explaining the nature and
source of the assets declared in his wealth statement. A mere declaration of
opening net assets cannot, in the absence of supporting evidence, be treated as
conclusive proof of their legitimate source. The appellant has also failed to
establish that the impugned addition suffers from duplication or that the
findings of the authorities below are otherwise contrary to the applicable
provisions of law.
We, therefore, find no sufficient
basis to interfere with the findings of the learned CIR(A), and the addition of
Rs.4,500,000/- is hereby maintained.
9. Question
No. 4:
Overall
validity of the impugned appellate orders.
9.1. Before
parting with the matter, we consider it necessary to observe that the burden of
establishing an explanation under section 111(1) is not discharged merely by
making a declaration in the return of income or wealth statement. The taxpayer
must provide an explanation which is supported by material capable of
verification and which reasonably establishes the nature and source of the
relevant amount, investment or asset. The Department, on the other hand, cannot
reject an explanation arbitrarily or merely on the basis of suspicion. It is
required to confront the taxpayer with the relevant information, consider the
explanation furnished and record an objective opinion in accordance with the
law. In the present case, the appellant was confronted with specific
discrepancies and was afforded opportunities to produce the relevant documents.
The findings recorded by the assessing authority are based upon the absence of
essential supporting material, including the revenue record, evidence of lawful
tenancy, cultivation particulars and a satisfactory explanation of the declared
assets.
9.2. The appellant has not been able to
demonstrate before us that the learned CIR(A) ignored any material documentary
evidence or that the conclusions drawn by the lower authorities were perverse,
arbitrary or contrary to the applicable statutory provisions. We also observe
that the learned CIR(A) did not mechanically affirm every addition made by the
assessing authority. Rather, after examining the nature of the transaction and
the findings recorded in the amended assessment order, the learned CIR(A)
deleted the addition of Rs.2,960,000/- relating to the alleged advance payment
for acquisition of agricultural land on Patta for Tax Year 2020. The learned
CIR(A) correctly appreciated that once the underlying transaction had itself
been treated as fabricated, the same alleged transaction could not
simultaneously be relied upon as an actual investment warranting a separate
addition under section 111 of the Ordinance. This finding demonstrates that the
learned CIR(A) independently examined the issues and granted relief wherever
considered legally warranted. The appellant has not identified any further
infirmity in the impugned appellate orders which would justify interference by
this Tribunal.
9.3. We have also considered the written arguments
furnished by the learned AR in booklet form. However, the legal propositions
and judicial precedents relied upon therein do not displace the fundamental
factual deficiency in the appellant's case, namely, the failure to establish
the actual agricultural activity and the resultant income claimed as exempt.
The statutory exemption under section 41 cannot be extended in the abstract,
without establishing that the income in question satisfies the definition of agricultural
income prescribed by the Ordinance. Likewise, the judicial precedents relied
upon by the appellant protect genuine agricultural income from federal taxation
and recognise the mandatory effect of the proviso to section 111(1). They do
not dispense with the requirement that the income claimed must be capable of
being established and worked back in accordance with the relevant provincial
agricultural income tax law. The appellant's case, therefore, fails on its own
factual and evidentiary foundation.
9.4. For the reasons discussed above, we are of
the considered opinion that the appellant has failed to discharge the
evidentiary burden cast upon him under section 111(1) of the Ordinance. The
jurisdictional objections are without merit; the alleged agricultural income
has not been satisfactorily substantiated, and the explanation regarding the
declared opening net assets remains unsupported by reliable documentary
evidence. The learned CIR(A) has, therefore, committed no legal or factual
infirmity warranting interference by this Tribunal.
10. Institutional observations and
recommendations for consideration by the Federal Board of Revenue.
10.1. Before parting with the matter, we consider it
appropriate to draw the attention of the Federal Board of Revenue towards a
broader institutional concern arising from the controversy examined in these
appeals. There may be instances where persons, with a view to explaining
unexplained investments, accumulated wealth, bank deposits or other assets,
resort to declaring substantial amounts under the description of agricultural
income, notwithstanding the absence of corresponding agricultural landholding,
lawful tenancy arrangements, actual cultivation, agricultural produce or
verifiable sale proceeds. Such practices, where established through proper
inquiry and evidence, may provide a means of introducing otherwise unexplained
or concealed money into the formal financial system under the garb of exempt
agricultural income, thereby resulting in the evasion of legitimate federal tax
liabilities.
10.2.
We are conscious that agricultural income, being constitutionally within the
legislative and taxing domain of the Provinces, cannot be subjected to federal
income tax merely because its genuineness is questioned by the Revenue
Department. Equally, the exemption provided under section 41 of the Ordinance
cannot be interpreted as conferring an unrestricted immunity upon every amount
declared as agricultural income, irrespective of its actual nature, source and
derivation. The proviso to section 111(1) of the Ordinance itself provides a
specific statutory mechanism for determining the extent to which an explanation
based upon agricultural income is required to be accepted. It is, therefore,
imperative that genuine agricultural income is protected while artificial or
fictitious claims, designed to explain otherwise unexplained wealth, are
identified through lawful and effective verification.
10.3. In order to address this issue in a systematic
and effective manner, we consider it appropriate to recommend that the Federal
Board of Revenue may examine the feasibility of adopting the following
measures, in consultation with the relevant Provincial Governments and their
revenue and agricultural income tax authorities:
(i) Integrated data-sharing mechanism:
An institutional mechanism may be developed to facilitate the lawful exchange
of relevant information between the FBR, Provincial Boards of Revenue and
provincial agricultural income tax authorities. Such a mechanism should enable
verification of agricultural income declared by taxpayers in their federal
income tax returns against the corresponding provincial land, revenue and
agricultural income tax records.
(ii) Year-wise verification of provincial
agricultural income tax: The provincial agricultural
income tax paid by a taxpayer may be verified with reference to the relevant
tax year, the landholding or cultivated area, the applicable provincial law and
the computation forming the basis of such payment. This would facilitate
determination of the extent of agricultural income capable of being worked back
in accordance with the proviso to section 111(1) of the Ordinance.
(iii) Verification of land ownership and tenancy:
Where agricultural income is claimed on the basis of ownership, lease, tenancy
or cultivation arrangements, the relevant records, including ownership
documents, mutations, tenancy agreements, lease arrangements and cultivation
particulars, may be obtained or verified directly from the competent provincial
revenue authorities.
(iv) Crop and yield verification:
The FBR, in consultation with the provincial agricultural departments, may
consider developing reasonable and area-specific benchmarks concerning the
nature of crops, cultivated area, average yield and prevailing market prices.
Such benchmarks may serve as indicators for identifying materially
disproportionate claims and for facilitating further verification wherever
necessary.
(v) Verification of agricultural transactions
and sale proceeds: In appropriate cases, the
Revenue authorities may examine evidence relating to the actual production and
disposal of agricultural produce, including sale proceeds, commission-agent
records, mandi receipts, relevant banking transactions and other reliable
evidence demonstrating the realization of agricultural income.
(vi) Reconciliation with wealth statements and
financial affairs: Agricultural income declared
over successive tax years may be examined in conjunction with the taxpayer's
wealth statements, bank deposits, investments, acquisition of assets and other
financial particulars. This exercise may assist in identifying instances where
substantial assets or unexplained funds are sought to be justified through
agricultural income claims which are not supported by corresponding
agricultural activity or credible financial evidence.
(vii) Risk-based scrutiny:
Appropriate risk indicators may be developed for identifying cases requiring
further examination, particularly where the agricultural income declared
appears disproportionate to the landholding, cultivated area, nature of crops,
agricultural tax paid, cultivation capacity or other available evidence. Such
indicators should be used for selecting cases for verification and should not,
by themselves, be treated as conclusive proof of an incorrect declaration.
(viii) Inter-provincial coordination:
A coordinated mechanism may also be considered for cases where a taxpayer
resides or files federal income tax returns in one Province but claims
agricultural income from land situated in another Province. The mechanism
should facilitate verification of the relevant land records, cultivation
particulars and provincial agricultural income tax payments across provincial
jurisdictions.
10.4. The aforesaid
measures are suggested with a view to strengthening verification, improving
institutional coordination and facilitating the identification of artificial or
unsupported claims of agricultural income. Their implementation may also reduce
reliance upon isolated documentary material furnished by taxpayers and enable
the Revenue authorities to undertake a more objective assessment based on
independently verifiable records.
10.5. At the same time, it
must be emphasised that these recommendations should not result in
indiscriminate scrutiny of persons genuinely deriving agricultural income. The
absence of any particular document, the fact that the taxpayer resides away
from the agricultural land, or the absence of ownership in the taxpayer's name
cannot, in isolation, be treated as conclusive evidence against a genuine
claim, particularly where agricultural activity is carried out through lawful
tenancy, lease or other permissible arrangements. Each case must be examined on
its own facts and in accordance with the applicable provincial law, section 41
and section 111 of the Ordinance, and the judicial principles governing the
matter.
10.6. The underlying
objective is not to subject genuine agricultural income to federal taxation,
but to ensure that the statutory protection available to such income is not
misused as a device for explaining otherwise unexplained money, investments or
assets, or for concealing income otherwise chargeable to tax under the
Ordinance.
10.7. In view of the foregoing, we consider it
appropriate that a copy of this order be forwarded to the learned Chairman,
Federal Board of Revenue, Islamabad, and the learned Member (Legal), FBR, for
consideration of the above observations and recommendations and for such
appropriate policy, administrative or technological measures, in consultation
with the relevant provincial authorities, as may be deemed necessary.
11. CONCLUSION:
Consequently,
all the questions formulated above are answered against the appellant–taxpayer.
The impugned appellate orders, to the extent challenged before this Tribunal,
are maintained and the appeals filed by the appellant–taxpayer are hereby
dismissed. A copy of this order shall also be transmitted to the learned
Chairman, Federal Board of Revenue, Islamabad, and the learned Member (Legal),
FBR, for their consideration of the institutional observations and
recommendations contained in paragraphs 10.1. to 10.7. above and for such
appropriate action as may be deemed necessary. Order accordingly.
Sd/- (MIAN ABDUL BASIT) JUDICIAL MEMBER |
Sd/- (M. M. AKRAM) JUDICIAL MEMBER |
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