Case Summary & Legal Holding

This judicial decision was delivered by the Supreme Court of Pakistan on 2022-05-31. The matter involves proceedings between Commissioner Inland Revenue, Zone-II, Regional Tax Office, (RTO) Lahore and Mian Liaqat Ali Proprietor, Liaqat Hospital, House No.6, Street No.6, Lal Pul, Panj Pir Road, Mughalpura, Lahore, officially reported as 2023 SCMR 534. The court reviewed applicable Pakistani statutes, procedural requirements, and governing case-law authorities. The full text below contains the complete facts, arguments, and legal reasoning rendered by the honorable bench.

Full Judgment Text & Judicial Ruling

Court Name: Supreme Court of Pakistan Judge(s): Ijaz-ul-Ahsan, Munib Akhtar, Sayyed Muhammad Mazahar Ali Akbar Naqvi Title:Commissioner Inland Revenue, Zone-II, Regional Tax Office, (RTO) Lahore

vs Mian Liaqat Ali Proprietor, Liaqat Hospital, House No.6, Street No.6, Lal Pul, Panj Pir Road, Mughalpura, Lahore Case No.: Civil Petitions Nos. 648-L, 649-L and 650-L of 2021 Date of Judgment:2022-05-31 Reported As: 2023 SCMR 534 Result: Appeals dismissed Judgment ORDER MUNIB AKHTAR, J. These matters were disposed of by means of the following short order: "We have heard learned counsel for the parties at considerable length and carefully gone through the case record for reasons to be recorded later, these petitions are converted into appeals and dismissed." The matters arose under the Income Tax Ordinance, 2001 ("Ordinance"), in relation to the tax years 2016 to 2108 of the same taxpayer (respondent herein). The question of law for the consideration of which the leave petitions were converted into appeals is set out in para 6 below. 2. The respondent filed his returns for the years in question, declaring rental income as well as business income, by way of practicing homeopathic medicine. It appears (though this is not relevant for present purposes) that an audit was conducted for at least one tax year and the return (deemed assessm ent order) amended. Thereafter, on or about 12.03.2019, a complaint was received by the concerned income tax authority (being the designated officer of Inland Revenue, herein after "the OIR") that the respondent had underreported (i.e., suppressed or concealed) his sales (and thus business income) from the practice of homeopathy. The OIR initiated enquiries on the complaint in respect of each tax year and on the basis of the details/record obtained concluded that there was "definite information" available within the meaning of section 122(8) of the Ordinance to warrant amendment of the deemed assessment orders. Accordingly, show cause notices were issued to the respondent on or about 13.11.2019 under section 122(5) (read with subsection (9)). The notices expressly made reference to the definite information that had been

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acquired by the OIR. Thus, the proceedings so far were entirely within the four corners of section 122. The importance of this will emerge later. 3. It appears that in the reply submitted to the notices the respondent essentially did not deny the allegations but sought to produce evidence/ material as regards the costs (i.e., expenses) incurred for the sales made (but not declared) so that the income chargeable to tax (under the head "income from business") could be properly calculated. The OIR now made a decisive shift in the proceedings. The respondent was intimated that the concealed sales attracted the provisions of section 111(1)(d) of the Ordinance. It was also stated that the said provision had to be read with section 39 (which relates to the head "income from other sources") with the result that no deductions in relation to any other head of income was permissible in the computation of income. This meant that the costs and expenses incurred in making the concealed sales (or such of them as would have been permissible deductions under the head "income from business") could not be taken into account. In the event, specific notices under section 111(1)(d) were issued on or about 12.12.2019. The respondent was called upon to show cause why, in terms of the said provision, the whole of the concealed sales ought not to be brought to tax. The replies filed by the respondent were found not to be satisfactory and the deemed assessment orders were amended on or about 16.01.2020 in terms of section 111(1)(d). 4. Being aggrieved by the foregoing, the respondent filed appeals before the CIT (Appeals), which were dismissed by a consolidated order dated 08.06.2020. The respondent took the matter further to the Appellate Tribunal, and there met with success. The learned Tribunal gave a consolidated decision on 08.10.2020. After noting that the respondent had placed before the OIR the costs and expenses incurred in respect of the concealed sales the Tribunal held that the authorities below had erred in concluding that the same were not to be taken into account while computing the amount that could be brought to tax under section 111(1)(d). The said expenditures were reproduced by the Tribunal in its order and it was thereafter observed as follows (emphasis supplied): "It is evident from above that all items of trading/profit accounts were drastically different. It is however, noted that the OIR was not justified to make addition under section III (1)(d) of the ITO, 2001. It is simple proposition that sales of goods invariably involves cost of sales and even gross business income is the difference of sales and cost of sales. The OIR had dear knowledge of sales as well as purchases declared by the appellant through reply. Obviously, Sales were made after having purchased the goods, therefore, treating sales alone as income without considering purchases was illegal and baseless action in the presence of purchases, allegation of suppression of sales was not valid and did not warrant addition under section 111 (1)(d) of ITO, 2001. It is also obvious that the taxpayer had suppressed both sales and purchase but it was in fact the difference of sales and purchase (gross profit) which was allegedly concealed for the purposes of charge of income tax. Since Profit and Loss account expenses mentioned in the revised chart (submitted through reply) have been ignored by both the below authorities for the reason that the provisions of section 111 of ITO, 2001 are punitive in nature therefore, no verifiable credit can be given to the appellant, is highly misconceived and misdirected, therefore, in our opinion, the actual suppressed income will be the difference of gross profit admittedly, derived by the taxpayer. It is an admitted fact that the taxpayer submitted all relevant documents qua expenses and it is evident that taxpayer explanation was not considered during the proceedings and it is clearly mentioned that explanation must be considered for the action under section 111 of the ITO, 2001 and this procedural lapse does not render the taxpayer punishable. The impugned order is, therefore, modified in so far as addition of concealed income is reduced to RS.5,869,126/-, Rs.4,927,638/- and Rs.4,944,029/- including rental incomes for the tax year 2016, 2017 and 2018 respectively."

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5. Being aggrieved by the decision of the learned Tribunal the Commissioner filed tax references before the High Court, which were dismissed by (identical) orders dated 26.01.2021. The learned High Court upheld the reasoning that had found favor with the learned Tribunal. It is against the said orders that the Commissioner sought leave to appeal from this Court. 6. During the course of the hearing it became clear that the leave petitions raised an important question with regard to the proper understanding and application of section 111(1) (d). After a full hearing the leave petitions were disposed of in terms of the short order noted above, while converting them into appeals to consider the following question of law: "Whether, in the facts and circumstances of the case, the Commissioner has properly interpreted and applied section 111(1)(d) of the Ordinance?" As is clear from the short order, this question was answered against the Department and in favor of the taxpayer, with the result that the appeals stood dismissed. We now set out the reasons for our decision. 7. Before proceeding further we may note that we are here concerned only with clause (d) of subsection (1) of section 111. Whether, and if so in what manner and to what extent, the analysis and reasons given herein apply also to the other three clauses of the subsection is left open for consideration in an appropriate case. 8. The answer given to the question posed above requires, for reasons that will become clear, a consideration of section 122(5) in addition to section 111(1)(d). For ease of reference, these provisions are set out below in table form, as applicable over the tax years in question: Section 111: Unexplained income or assetsSection 122: Amendment of assessm ents (1) Where -- (d) any person has concealed income or furnished inaccurate particulars of income including --- (1) the suppression of any production, sales or any amount chargeable to tax; or (ii) the suppression of any item of receipt liable to tax in whole or in part, and the person offers no explanation about the nature and source of the ... suppression of any production, sales, any amount chargeable to tax and of any item of receipt liable to tax or the explanation offered by the person. is not, in the Commissioner's opinion, satisfactory, the ... suppressed amount of production, sales or any amount chargeable to tax or of any item of receipt liable to tax shall be included in the person's income chargeable to tax under head "Income from Other Sources" to the extent it is not adequately explained.(5) An assessm ent order in respect of tax year, or an assessm ent year, shall only be amended under subsection (1) and an amended assessm ent for that year shall only be further amended under sub-section (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that-- (i) any income chargeable to tax has escaped assessm ent; (ii) or total income has been under- assessed, or assessed at too low a rate, or has been the subject of excessive relief or refund; or (iii) any amount under a head of income has been misclassified. Two points may be noted. Firstly, in section 122(5), for the words "definite information acquired from an audit or otherwise" the words "audit or on the basis of definite information" were substituted by the Finance Act, 2020. That change does not apply in relation to the tax years in question in the facts and circumstances of the case before us but also, in our view, does not in any case have any material bearing on the analysis and reasoning given herein. Secondly, there are also other subsections of section 122 whereby the deemed assessment order can be amended (or, more precisely, re-amended). While we focus on subsection (5) for analytical purposes, whatever is said

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herein in relation thereto appeal, mutatis mutandis, in respect of the other such subsections as well. 9. Before us, learned counsel for the Department focused attention on sub-clause (i) of clause (d) of section 111(1). The case put forward was that it was this provision that was applied by the OIR (and correctly so) as there had admittedly been suppression (i.e., concealment) of sales by the respondent. Learned counsel for the respondent submitted that the OIR had misconstrued this provision, and the correct approach was that as taken by the learned Tribunal. The submissions became more refined during the course of the hearing and the point in issue boiled down to this: whether the words "chargeable to tax" as used at the end of sub-clause (i) applied only to the phrase immediately preceding it (i.e., "any amount") or to the whole of the sub-clause, i.e., also to the suppressed production and/or sales? If the former, then the approach taken by the Department was correct; if the latter, then the view taken by the Tribunal was to be preferred. This was so because if the suppressed production Or sales were only such as were "chargeable to tax" that could be so only by taking the permissible deductions (by way of expenses and costs incurred) into account. Sales or production, in and of themselves, are not (generally) liable (i.e., chargeable) to tax, except as may otherwise be provided in the 2001 Ordinance (e.g., by way of imposing a "final tax"); such exceptions are legion and, so it sometimes seems, increasing all the time. It is (again, generally) only the "net" amount (i.e., receipts minus costs/expenses) that is chargeable to tax. (The receipts are usually referred to as "gross receipts" or "gross income".) It is the "net" amount that, looking at the matter conceptually and in terms of the settled principles that underpin income tax law, is regarded as "income" properly so called, and liable to tax. As noted above, the learned Tribunal took the view that since section 111(1) (d) was a "punitive" provision it was this approach that was to be taken. On the other hand, if the words "chargeable to tax" did not apply to sales or production, then it was only the "gross" amount thereof that was relevant, and the whole of it could be brought to tax under the head "income from other sources". This was of course the contention of learned counsel for the Department. 10. Clause (d) of section 111(1) confers a power on the Commissioner to bring to tax unearthed income, i.e., income which was concealed by either suppression of sales or production or any amount chargeable to tax (sub-clause (i)) or suppression of any item of receipt liable to tax, in whole or in part (sub-clause (ii)). Although the word "including" appears to indicate that the two sub-clauses are but particular and non-exhaustive instances of a more general provision (viz., concealment of income or furnishing of inaccurate particulars of income), it is at least arguable that the situations itemized in the sub-clauses are exhaustive. This is so because the concluding part of subsection (1) specifically mentions (insofar as clause (d) is concerned) only the income unearthed from the situations particularized in the sub-clauses as liable to inclusion in the taxpayer's income under the head "income from other sources", and not generally to concealed income or income not declared by reason of furnishing of inaccurate particulars. However, we are, in the facts and circumstances of the present case, concerned with the specific situation contained in sub-clause (i), i.e., suppression of sales and therefore it is not necessary to give a definitive answer to this aspect of clause (d). 11. Having considered the point, we are of the view that there are at least two reasons why the Department's view cannot prevail and the one taken by the Tribunal is to be preferred. Firstly, on the Department's reading of the provision, sub-clause (i) of clause (d) creates two categories: production or sales on the one hand, and "any amount chargeable to tax" on the other. In, respect of the first category it is the "gross receipts" or "gross income" that can, in its entirety, be taxed. In respect of the other, it is only "income" properly so called that can be made liable. Why there should be such a distinction is not readily apparent. It is true that in respect of the interpretation of fiscal statutes the State is given greater latitude in respect of choosing what is to be taxed (or

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exempted) and if so, in what manner and to what extent. However, this approach is but a rule of interpretation (and one among several) that aids the Court in coming to the correct conclusion with regard to the provision under consideration. It is not an absolute rule, to be applied rigidly and strictly to the exclusion of all else. Production and sales are two types of activity that produce income. However, as is well established, income is a very broad and inclusive concept. In the felicitous words of Kanga and Palkhiwala: "The categories of income are never closed (see Fawad Ahmad Mukhar and others v. Commissioner Inland Revenue and another 2022 SCMR 426, Para 9 and the authorities there cited). To pick out only two types of income (production and sales) and treat those "gross receipts" as liable to tax, out of the vast sea that otherwise constitutes "income" properly so-called ("any amount chargeable to tax") is in our view not the correct approach. No discernable yardstick or standard appears in the provision as would justify such differentiation and radical departure from settled principles of income tax law. Like should (unless otherwise lawfully dictated) be treated alike. If "any amount" can be brought within the scope of sub-clause (i) of clause (d) only if, and to the extent, that it is "chargeable to tax" (i.e., constitutes "income" properly so called), then production and sales must be given the same treatment. Thus, it is only production or sales chargeable to tax that can be brought within the ambit of clause (d). The categorization made by the Department is artificial and cannot be accepted. The approach taken by the learned Tribunal was correct. 12. The second reason why we came to the foregoing conclusion is, perhaps, not so obvious but no less important for that. It requires a consideration of the power conferred on the Commissioner under section 122(5), and its comparison with clause (d) of section 111(1). (Needless to say, the powers of the Commissioner under both provisions are invariably exercised by the OIR.) Looking at section 122(5) first, this provision enables the OIR to amend the deemed assessment order so as to ensure that the correct amount of tax is levied (and thereafter paid or recovered, as the case may be). Three categories of situations are envisaged. The power to amend can be exercised only if the facts and circumstances of the case come within the scope of any of the three clauses and then also, only (for the tax years in question, in the context of the appeals now before us) if there is "definite information" available. Furthermore, the power to amend can only be exercised within a specified period and not thereafter (which is, broadly speaking, five years as computed within the framework provided by subsections (2) and (4)). The first of the three clauses of subsection (5) provides for the situation where "any income chargeable to tax" has escaped assessment. Quite obviously, what can be brought to tax here is "income" properly so called, and not "gross receipts" or "gross income" as such. 13. Let us now compare the foregoing position with the two sub-clauses of clause (d) of section 111(1). Both require for there to be "suppression", which would be of production, sales or any amount chargeable to tax in the case of sub-clause (i), and "any item of receipt liable to tax in whole or in part" in the case of sub-clause (ii). Clearly, anything that has been "suppressed" within the meaning of these sub-clauses is income (or leads to income) that has been escaped assessment within the meaning of clause (i) of section 122(5). Put differently, at first sight it would seem that the situations envisaged in the two sub-clauses of clause (d) of section 111(1) overlap with, or are equivalent to, the situation envisaged by the first clause of section 122(5). However, this would not be wholly so in respect of sub-clause (i) of clause (d) on the Department's interpretation. On that approach, other than production or sales, "any amount chargeable to tax" would indeed overlap with "any income chargeable to tax [as] has escaped assessment". This is so because in both cases, it is the "net" amount, i.e., income properly so called, that would be brought to tax. In respect of production or sales the position would however be different. If section 122(5) were to be applied it would be only so much of the production or sales as result in a "net" amount, i.e., income properly so called, that would be regarded as having escaped assessment and hence liable to tax.

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However, if section 111(1)(d) were to be applied in the manner as understood by the Department it would be the "gross" amount, i.e., the whole of the production or sales suppressed, that could be brought to tax. Clearly, this would not be the same as what is provided by clause (i) of section 122(5). More precisely, the tax liability determined under the two provisions would be different, and the could be quite significant, depending on the facts and circumstances of the case. 14. Now, if we assume for the moment that the Department's approach is correct then for present purposes the crucial point is this. The Ordinance provides no yardstick, guidance, standard or measure when or how, in respect of the same thing (i.e., suppressed or concealed production or sales), it is section 111(1)(d) that is to be applied or section 122(5). The matter is left at the unfettered discretion of the OIR. He is the sole judge of whether it is the former or the latter provision that is to be applied. It is his unencumbered wish and choice. But, as just seen, the tax liability is worked out quite differently under the two provisions. It follows that in this scenario the amount of tax with which the taxpayer is to be burdened is entirely at the arbitrary will of the tax authority. And indeed, this is precisely what happened in the present case. As noted above, the OIR (quite correctly) started proceedings under section 122(5) and (again quite correctly) having gathered the, material/record as constituted definite information issued show cause notices in terms of the said provision. But as soon as the taxpayer raised the point of determining the "net" amount, i.e., income properly so called, he pivoted and took off on an entirely different direction. Effectively abandoning section 122(5), he simply opened proceedings under section 111(1)(d). There, as per the Department's interpretation, he was wholly unencumbered with any considerations of determining the "net" amount, and could bring the whole of the "gross receipts" to tax. As found by the learned Tribunal that led to a substantially inflated tax liability for the respondent. 15. The foregoing consequence, which follows necessarily and inevitably from the Department's interpretation inasmuch as it hands an unfettered discretion to the OIR, is not merely startling. It is, in our view, entirely impermissible. This is so because it is contrary to the rule, repeatedly affirmed and applied, laid down by this Court in the leading case of Waris Meah v. The State and another PLD 1958 SC 157. It is to consider this rule that we must now turn. 16. The dispute in Waris Meah arose out of the Foreign Exchange Regulation Act, 1947 ("Act"). At issue was the constitutionality of certain amendments made to the Act, the appellants' case being that the same were violative of the equality provision of the 1956 Constitution (Article 5, which is in pari materia the present Article 25). As presently relevant, prior to the said amendments a person guilty of an offence under the Act could be tried under section 23 thereof (read with the relevant provisions of the Code of Criminal Procedure) only by a court of criminal jurisdiction. Furthermore, the prosecution could only be launched by a person authorized by the Central (i.e., Federal) Government or the State Bank of Pakistan. By the impugned amendments (made in 1956) three new sections were inserted, being sections 22A, 23A and 23B. On a close examination, the Court discerned the following differences between section 23 on the one hand and the newly added provisions on the other (pp. 163-4; emphasis supplied): "(1) that under section 22A an offender against the Act can only be proceeded against either in a Court under the ordinary law or before a Tribunal under section 23B or before an Adjudication Officer under section 23A ; (2) that when proceeded against under the ordinary law the sentence on conviction may be that of imprisonment, and if the case is committed to the Court of Session, of fine in any amount; (3) that if convicted by the Tribunal, the accused must be awarded a sentence of imprisonment, and the sentence of fine may be in any amount, though there have been no commitment proceedings and the trial has not been held with the aid of a jury or assessors; (4) that if the accused is taken before an Adjudication Officer, he cannot be sentenced to imprisonment and the maximum penalty that can be imposed upon him cannot exceed three

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times the value of the amount involved in the commission of the offence; (5) that whether a person is to be tried under the ordinary law or by a Tribunal or by an Adjudication Officer depends on the will of the Central Government or of the State Bank; and (6) that though the State Bank in the exercise of its functions may under section 25 be controlled by general or special directions of the Central Government, the Central Government itself has as uncontrolled and unrestricted power to decide how each offender has to be dealt with." The challenge to the amendments under Article 5 was sustained in the following terms (pp. 167-8; emphasis supplied): ".....In the present case, the question to be determined is whether the impugned Act is ex-facie discriminatory, and we have no hesitation in saying that it is. Three tribunals with different powers and procedures have been set up. The Act creating them contains no indication as to which class or classes of cases are to go before a Court and…

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