Sections 111, 122 of Income Tax Ordinance: FBR cannot issue combined notice to taxpayer: IHC

ISLAMABAD: Islamabad High Court (IHC) has ruled that the Federal Board of Revenue (FBR) cannot issue a combined notice of Section 111 (Unexplained assets/income) and Section 122 (Amendment of assessment) of the Income Tax Ordinance, 2001, to the taxpayer.

This important judgment has been issued in favour of the FBR by the IHC in the writ petition number 1826 of 2021. Shaheer Bin Tahir appeared before the IHC on behalf of the tax department. Salaar Khan advocate appeared on behalf of the petitioner company.

According to the judgement of the IHC, there is no need for setting aside show-cause notice issued to Zaver Petroleum Limited and the department only requires following the dictum of the Supreme Court of Pakistan as well as the observations made by this Court hereinabove.

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Details revealed that the petitioner company is engaged in the business of exploration of oil and gas; it sold its working interest comprising of eight leases and two licenses in Mirpurkhas and Khipro Concession to Bow Energy Resources (Pakistan). The assignment agreement between the parties was executed in 2013, but the transaction was subject to the approval of the Directorate General of Petroleum which was accorded in 2015.

On Feb 04, 2021, Additional Commissioner Inland Revenue, issued a notice to the petitioner under section 126 of the Income Tax Ordinance, 2001 (the Ordinance).

The department has received definite information regarding sales of working interest, hence petitioner was called upon to provide further information/documents.

A show-cause notice was issued by the concerned tax official under section 122(5A) of the Ordinance; the referred notice clearly shows that it was not solely under section 122(5A) but also under section 111 (1)(d) of the Ordinance. The petitioner has challenged the show-cause notice dated March 31, 2021, in the instant petition.

Learned counsel for the petitioner inter alia contended that scope of show-cause notice under section 111(1)(d) of the Ordinance is completely different from that under section 122(5A) of the same and both cannot be clubbed.

In this regard, reference was made to the decision of the Supreme Court of Pakistan.

It was submitted that since notice is without jurisdiction and operates under the wrong premise of law, hence writ petition was filed instead of contesting the matter before the department.

The counsel for the respondents infer alia contended that sections 111 (1) (d) and 122(5A) of the Ordinance can be clubbed in one notice pursuant to the judgment reported as Commissioner Inland Revenue Zone Bahawalpur, Regional Tax Office, Bahawalpur Vs Messrs Bashir Ahmed (deceased) through LRs (2021 SCMR 1290).

It was further submitted that the instant petition is not competent, as it is against a show-cause notice and no final order has yet, been passed. It was also submitted that the exceptions, under which, show-cause notice can be challenged, are not attracted in the facts and circumstances of the instant case.

The IHC observed that the entire controversy revolves around the fact whether a combined notice under sections 111(1)(d) and 122(5A) of the Ordinance can be issued.

The IHC observed that the reading of section 111 shows that under different circumstances, the department can ask for an explanation of unexplained income or assets and in particular, under section 111(1)(d), where a person has concealed income or furnished inaccurate particulars of income including the suppression of any production, sales or any amount chargeable to tax, or the suppression of any item or receipt liable to tax.

The scheme of law is such that under section 111(1), an unexplained asset or the income of the taxpayer can be added to his income and taxed accordingly, but first, notice is to be given to him to explain, whereas section 122(5A) ibid operates on the different sphere and the assessment of a taxpayer can be amended if same is prejudicial to the revenue.

The Supreme Court has observed that the scheme of law would be such that notice under section 111 ibid could be made and after the findings on the same to the effect that assets/income is to be included, the assessment order can be amended. It was further observed that notice under section 111 and one under section 122(9) cannot be clubbed, but it can simultaneously be done provided the notice so states.

In the instant case, the reading of the notice, shows that initially an explanation has been sought under section 111 of the Ordinance and it is upon said that failure on part of taxpayer/petitioner, proceedings under section 122(5A) would be amended.

The IHC stated, “in my opinion, this is making a hotchpotch of things, as the department should have first proceeded to issue a notice under section 111 (1) (d) and only if, explanation was unsatisfactory, the amount concealed should be added to his income and then notice for amendment be made, as even under section 122 ibid, a notice under section 122(9) has to be issued.

Having said that, since the petitioner has been asked to explain the concealed income/receipts from the sales of the Concession with respect to leases and licenses mentioned above, it needs to render explanation as to the same as per mandate of section 111 ibid“.

The petitioner should furnish explanation, if any, with respect to the information or the transaction mentioned ’Department, if after scrutiny, finds that explanation is not satisfactory, may proceed under section 122 ibid but only by first issuing a notice under Section 122(9) of the Ordinance.

The instant petition stands disposed of in light of above observations, the IHC added.

Copyright Business Recorder, 2023