MUHAMMAD SAJID MEHMOOD SETHI, J.- This consolidated judgment shall decide instant Reference Application, along with connected Reference Applications, as common questions of law and facts are involved in these cases:-
1. P.T.R. No.58 of 2012 titled Commissioner Inland Revenue, Gujranwala v. Yasar Irfat Prop. M/s. Din Metal Works, Gujranwala .
2. I.T.R. No.99154 of 2017 titled Commissioner Inland Revenue, Faisalabad v. M/s. Aman Ullah Broker , Faisalabad .
3. I.T.R. No.99165 of 2017 titled Commissioner Inland Revenue, Faisalabad v. M/s. Aman Ullah Broker , Faisalabad.
4. I.T.R. No.246447 of 2018 titled Commissioner Inland Revenue, Lahore v. Muhammad Aslam Prop. Innovative Construction Company , Lahore.
5. I.T.R. No.246448 of 2018 titled Commissioner Inland Revenue, Lahore v. Muhammad Aslam Prop. Innovative Construction Company , Lahore.
6. I.T.R. No.246449 of 2018 titled Commissioner Inland Revenue, Lahore v. Muhammad Aslam Prop. Innovative Construction Company , Lahore.
7. I.T.R. No.7866 of 2019 titled Commissioner Inland Revenue, Lahore v. M/s. Chaudhry Steel Re-Rolling Mills Pvt. Ltd., Lahore & another .
2. Through these Reference Applications under section 133(1) of the Income Tax Ordinance, 2001 ("the Ordinance of 2001" ), following question of law, asserted to have arisen out of impugned orders passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ("Appellate Tribunal") , in instant and connected Reference Applications, has been proposed for our opinion :- "Whether there is a need to issue a separate notice for addition u/s 111 when the law only requires that if the explanation offered by a taxpayer is not satisfactory or no explanation is offered by the taxpayer , the unexplained income shall be included in the person' s income chargeable under the head "income from other sources" after confronting the taxpayer u/s 122(9) of the Income Tax Ordinance, 2001."
3. Brief facts of instant Reference Application are that respondent taxpayer filed income tax return for the year 2009 declaring his assets in the Wealth Statement amounting to Rs.3,120,000/-. Later on, it transpired to assessing officer that the assets have been acquired by the taxpayer through sources of income concealed from the applicant department, thus, notice under Section 122(9) was served upon respondent taxpayer , which culminated in passing order-in-original dated 18.05.2016 making addition in income of taxpayer of Rs.3,120,000/- on account of Assets and raised tax demand of Rs.780,000/-. Feeling aggrieved, respondent-taxpayer assailed said order in appeal before Commissioner Inland Revenue (Appeals), whereby addition was reduced to Rs.1,920,000/-, vide order dated 10.01.2017. Feeling dissatisfied, respondent-taxpayer filed second appeal before the Appellate Tribunal, whereby orders passed by fora below were set-aside and appeal was accepted vide order dated 06.09.2017.
Hence, instant Reference Application.
4. Learned Legal Advisors for applicant- department submit that learned Appellate Tribunal was not justified to annul the addition made by learned fora below on the ground of non-issuance of separate notice under Section 111 of the Ordinance of 2001 to the taxpayer. They add that learned Appellate Tribunal has failed to appreciate that respondent taxpayer failed to explain the sources of his investment. They further submit that as notice under Section 122(9) was issued, therefore, there was no need to issue separate notice under Section 111 of the Ordinance of 2001. They argue that even non-issuance of notice under Section 111 would not declare the proceedings conducted under said provisions of law as illegal and without jurisdiction. They maintain that non- issuance of separate notice under Section 111 has not caused any prejudice to respondent-taxpayer as substantial compliance of said provisions of law has been made. By referring to definition of "Notice" as available in various dictionaries, learned Legal Advisors contend that notice" means notice of a fact or condition which includes actual knowledge, information, reason to know about it, knowledge of related fact etc. They further contend that jurisdiction to assess and the liability to pay the tax are not conditional on the validity of the notice and if the proceedings are in conformity with or according to the intent and purpose of law, such mistakes, being capable of correction, would not render the same invalid. They have placed reliance upon Commissioner of Income Tax, Karachi v. Abdul Ghani (2007 PTD 967), Collector of Sales Tax and Central Excise, Lahore v.
Zamindara Paper and Board Mills and others (2008 SCMR 615), Commissioner of Income-T ax v. Girdhari Lal (2002 258 ITR 331 Raj) .
5. Learned counsel for the respondent-taxpayers defend the impugned orders and submit that compliance of mandatory provisions of Section 111 of the Ordinance of 2001 was not made, hence, learned Appellate Tribunal has rightly annulled the impugned additio n. They have placed reliance upon Commissioner of Income Tax, Special Zone, Corporate Region, Karachi v. Messrs Shaista Estate (Pvt.) Ltd. (2010 PTD 704), Commissioner Inland Revenue v. Muhammad Shafique (2015 PTD 1823 ) and Commissioner Inland Revenue, Zone-I, Regional Tax Office, Sukkur v . Messrs Ranipur CNG Station, Ranipur (2017 PTD 1839 ).
6. We have heard the arguments of learned counsel for the parties and perused the record with their assistance.
7. The question before this Court is whether specific notice to a taxpayer is pre-requisite to include unexplained income / assets in income chargeable to tax in terms of Section 111(1) of the Ordinance of 2001 and without such notice substantial compliance of said provisions of law could not be made. For ease of reference, Section 111(1) ibid, is reproduced hereunder:- "111. Unexplained income or assets---(1) Where--
(a) any amount is credited in a person's book of account;
(b) a person has made any investment or is the owner of any money or valuable article;
(c) a person has incurred by expenditure; or
(d) any person has concealed income or furnished inaccurate particulars of income including--
(i) 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 amount credited or the investment, money, valuable article, or funds from which the expenditure was made 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 amount credited, value of the investment, money, value of the articles, or amount of expenditure 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.
Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such 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."
8. Perusal of the provisions of Section 111 of the Ordinance of 2001 shows that if the instances / categories of unexplained income and assets, mentioned therein, come to the knowledge of the Commissioner, he is not obliged to form an opinion on the basis of information so gathered rather is required to issue notice to the taxpayer seeking explanation, confronting the information collected that its case comes within the head(s) specified in subsection (1).
Though word "notice" is not specifically mentioned in the said provisions of law but words "...the person offers no explanation..." and "...or the explanation offered by the person is not, in the Commissioner's opinion, satisfactory..." clearly suggest that for an explanation to be offered by the person, he must have been issued a notice. After said notice and failure on the part of taxpayer to offer satisfactory explanation, such addition can be made in the income of the taxpayer. For an explanation to be offered by a registered person, he must have been issued a notice without which no explanation could be offered, within the contemplation of Section 111 of the Ordinance of 2001. Reference can be made to the cases of Messrs Ranipur CNG Station and Muhammad Shafique supra.
9. In the case of Messrs Ranipur CNG Station , the Hon'ble Division Bench of Sindh High Court has observed that only after confronting the taxpayer with any of the eventualities contained in Section 111 of the Ordinance of 2001, through a specific notice, and after its failure to advance any good explanation regarding source of amount invested, the addition, if any made, would be without lawful authority . The relevant observations are reproduced hereunder:- "4. From bare perusal of the above statutory provisions, it is clear that the addition under section 111 of the Income Tax Ordinance, 2001, can be made, only if an opportunity is provided to the taxpayer through specific Notice, whereby, the taxpayer is confronted with any of the aforesaid eventuality as visualized under section 111 of the Income Tax Ordinance, 2001, whereas, if the taxpayer fails to offer any explanation about nature and source of the amount credited or the investment made, money or valuable articles, or funds from which the expenditure was made; only then, such addition can be made in the income of the taxpayer. In the instant case, it appears that no Notice under section 111 of the Income Tax Ordinance, 2001 was issued to the taxpayer, nor the taxpayer was specifically confronted with such proposed addition by the taxation officer so that the taxpayer could have offered some explanation in this regard. In view of above undisputed facts, the addition made by the taxation officer under section 111 in the instant matter appears to be without any lawful authority."
This is also further fortified by the decision of learned Division Bench of this Court in the case of Muhammad Shafique supra. The operative part of the observations is reproduced hereunder:- "18. A consideration of section 111 of the Ordinance in its entirety and holistically would clearly bring forth the fact that the section has three distinct and clearly defined stages. The first stage relates to information; the second is as regards discovery and the third is the formation of opinion by the Commissioner. Although it is not clearly mentioned that a notice should be served upon the person in terms of section 111 of the Ordinance yet this can be culled out from a bare reading of the provisions thereof. Subsections (1)(a,b,c) relates to the part where information comes to the knowledge of the Commissioner as a first step. This information could be relating to either any amount being credited in a person's books of account, a person having made any investment or being the owner of any money or valuable article or a person having incurred any expenditure. Then comes the stage of discovery by the Commissioner relating to the amount referred to in subsection (1). This discovery can only be on the basis of tangible evidence and material which comes in the hands of the Commissioner and on the basis of which a notice seeking an explanation from the person shall be issued. The words "the person offers no explanation .... or the explanation offered by the person is not, in the Commissioner's opinion, satisfactory" would show that for an explanation to be offered by the person he must have been issued a show-cause notice by the Commissioner. For, without a show-cause notice there can be no explanation to be offered by the person. This leads to the conclusion that a show-cause notice is envisaged by section 111 of the Ordinance. In our opinion, the stage at which the notice is issued is the stage which will be deemed to be within the meaning of the term "discovered by the Commissioner" as used in subsection (2) of section 111 of the Ordinance. The said notice must be based on the information and on the belief of the Commissioner that the case is one which falls under any of the heads specified in subsection (1) of section 111 of the Ordinance. We are firmly of the opinion that discovery is an intermediate stage between the Commissioner getting the information and forming an opinion."
10. Non-issuance of separate notice under Section 111 has caused prejudice to respondent-taxpayer as substantial compliance of said provisions of law has not been made. The ordinary meanings of "Notice" as referred to by learned Legal Advisors, with reference to various dictionaries, are not applicable to the issue in hand. Non-issuance of proper notice in order to invoke provisions of Section 111 cannot be taken lightly and its non compliance may lead to render the proceedings not in conformity with or according to the intent and purpose of law. In the instant case, neither notice under Section 111 of the Ordinance of 2001 has been issued to the taxpayer nor was the taxpayer specifically confronted with such proposed addition so that the taxpayer could have advanced some explanation in this regard. Thus, impugned addition appears to be without any lawful authority.
11. So far as argument of learned Legal Advisors of applicant-department, with reference to the cases of Abdul Ghani and Zamindara Paper and Board Mills supra, that mere substance of notice is to be seen and mentioning of Section 111 with its all ingredients along with notice under Section 122(9) read with Section 122(5A) fulfills the conditions, suffice it to say that law mandates the issuance of separate notice / explanation within the contemplation of Section 1 11, therefore, same cannot be made redundant.
12. In view of the above, our answer to the proposed question is in affirmative i.e. against the applicant- department and in favour of respondent-taxpayers.
This Reference Application, along with connected Reference Applications, is decided against applicant- department.
13. Office shall send a copy of this order under seal of the Court to learned Appellate Tribunal as per Section 133
(5) of the Income Tax Ordinance, 2001.