The Lahore High Court (LHC) has directed the Federal Board of Revenue (FBR) to explain why the unexplained income of Rs 500,000, declared before August 8 under the Investment Tax Scheme (Income Tax Circular 3 of 2008) was not accepted in a case where proceedings were pending against the taxpayer.
This case is first of its kind where lucrative amnesty scheme for legalisation of hidden income/assets has been challenged in the judicial fora. In a writ petition filed by Naved A Andrabi, Advocate, on behalf of a taxpayer on Wednesday, the court was informed that the issue mainly involved cases where taxpayers had accepted FBR offer for legalisation of undisclosed income under Circular 3 of 2008.
There was no restriction on availing the scheme, where the proceedings were pending against the taxpayers under Circular 3. Some taxpayers filed their declarations for legalisation of unexplained income before the issuance of amended Circular 8 of 2008. Under the amended circular, the scheme would not be applicable where proceedings were pending against the taxpayers.
Details showed that the Investment Tax Scheme was issued under Circular 3 of 2008 on July 1, 2008. The salient features of the scheme were that all existing and non-existing taxpayers were allowed to declare their undisclosed assets/income which was not charged to tax before June 30, 2008. It could be declared by paying tax @ 2 percent of the ''fair market value'' of such income/assets.
The scheme was immediately availed by a number of persons including all such persons against whom proceedings were under process by the taxation authorities either under audit or other proceedings under the Income Tax Ordinance, 2001. The scheme was introduced by Circular 3 of 2008 allowing the existing taxpayers to avail benefits of the scheme even if the proceedings were pending or were under process with the taxation authorities.
On August 8, 2008, the FBR issued Circular 8 of 2008 whereby the Investment Tax Scheme was unilaterally amended and the scheme was declared to be not applicable where proceedings were pending before the department, appellate authority or any court.
The benefit of the Investment Scheme was availed where proceedings were initiated by the department and declarations were filed before August 08, 2008, however, the department rejected all such declarations by taking support of Circular 8 of 2008 and re-initiated the proceedings to finalise the cases.
The petitioner said that the rejection made by the department has been challenged before the LHC on the ground that the declarations made under circular 3 of 2008 cannot be rejected on the basis of amendment made by circular 8 of 2008. The declarations filed before August 8, 2008 have to be accepted even if they pertained to assets/income against which the department was proceeding against the taxpayers.
It was contended that the taxpayers who had acted in the light of the offer made by Circular 3 of 2008 and had filed their declarations before the issuance of amending Circular 8 of 2008 had an accrued vested right which now cannot be taken away.
On July 15, 2008 the petitioner availed the benefits of the Investment Tax Scheme 2008 and declared a sum of Rs 500,000 as unexplained income. After a lapse of more than a month the department intimated to the taxpayer that the declaration filed did not qualify to be accepted under the scheme as the proceedings against the Petitioner were pending and in progress at the time of introduction of the scheme.
The department simultaneously issued notice u/s 122(9) read with section 122(5) of the Ordinance by showing his intention of making an addition of Rs 500,000 into the income of the taxpayer which was already covered under the investment scheme.
Justice Khawaja Farooq Saeed of LHC, taking cognisance of the issue, issued pre-admission notices to the Commissioner, Audit Regional Tax Office, Lahore to explain the position. In the meantime the proceedings before the Audit Officer have been stayed with the directions to not to pass any final order. The next date of hearing has been fixed on September 12, 2008.
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