MR. JUSTICE SHAHID JAMIL KHAN (1). The question for examination and our opinion is:-- "Whether tax charged under Section 111 of the Income Tax Ordinance, 2001, for non-payment of Agricultural Tax, would sustain, if the tax and Agricultural Income Tax is paid during proceedings of appeal before the Appellate Tribunal Inland Revenue?"
2. Appellate Tribunal Inland Revenue ("Appellate Tribunal"), in the order dated 16.06.2022, impugned before us, has vacated the order under Section 111 of the Income Tax Ordinance, 2001 ("the Ordinance of 2001") on payment of the Agricultural Tax. Relevant provisions of Section 111 are reproduced hereunder:-- "111. Unexplained income or assets.--(1) Where--
(a) any amount is credited in a person's books of account;
(b) a person has made any investment or is the owner of any money or valuable article;
(c) a person has incurred any 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--
(a) the amount credited, value of the investment, money, value of the article, or amount of expenditure shall be included in the person's income chargeable to tax under the head "Income from Other Sources" to the extent it is not adequately explained; and
(b) 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 the head "Income from Business" 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."
[emphasis supplied]
3. Bare reading of section 111 of the Ordinance of 2001 shows that it envisages explanation, inter alia, of source of any income or asset to the satisfaction of Commissioner concerned. However, the proviso to subsection (1) makes it obligatory by using the word "shall", to accept the explanation, if agriculture income tax paid under the relevant provincial law for the amount credited, investment made, money or valuable article owned and funds from which the expenditure was made.
4. Facts of the case are that agriculture income was shown in return for tax year 2014. Notices under Section 122(5A) were issued in absence of the proof for payment of provincial agriculture income tax, the declared amount was taxed under Section 111. Respondent-taxpayer filed appeal before the Appellate Tribunal being unsuccessful before Commissioner (Appeals). During proceedings, challan for payment of agriculture income tax was produced, which was not disputed by the department. The department had itself dropped similar proceedings for tax years 2015, 2016 & 2017 on production of proof for payment of agriculture income tax. It was, however, argued that penalty and default surcharge for late payment was to be imposed and recovered. The Appellate Tribunal decided the appeal, with following reasons:-- "10. From the discussion made above it is clear that the taxation of agricultural income is not a matter under the Income Tax Ordinance, 2001. Rather it is a provincial matter and its collection and consequences of delayed payment/non-payment are to be governed by the provincial law.
Keeping in view all the above said legal and factual arguments we are of the opinion that the orders of both the authorities below are not sustainable for the following reasons/grounds:-- a. The taxpayer/appellant has already made payment through Challan 32-A dated 24.12.2020 in favour of the provincial authority amounting to Rs. 8,973,921/- for the tax year 2014. The delay of payment and its consequences are not subject matter of the Income Tax Ordinance, 2001. b. As it is clear from the language of the provisions/proviso of section 111 of the Ordinance that the credit of agricultural tax shall be given to the taxpayer against the creation of assets/expenditures made by the taxpayer. In this case it is evident from the orders of lower authorities that no such credit has been claimed by the taxpayer except to declaration of agricultural income itself.
11. For the foregoing reasons, the orders of both the authorities below are annulled and the taxpayer's appeal is allowed in the manner and to the extent indicated above. Order accordingly."
[emphasis supplied]
5. We uphold the decision of annulling the orders for charging income tax under Section 111, on payment of provincial agriculture income tax.
The amount declared as agriculture income, though not taxable under Ordinance of 2001, would be credited in the books of account of taxpayer, therefore, falls in category (a) under the Section 111.
Taxpayer's claim of agriculture income would fail, if on explanation sought, proof for payment of provincial agriculture income tax is not produced. The consequence would be that the amount so credited in the books of account shall be taxed under Ordinance of 2001 as ' income from other sources" and not as agriculture income.
Agriculture income cannot, by any interpretation, be taxed under the Ordinance of 2001, being beyond competence of the Federation under Entry 50 of Fourth Schedule to the Constitution of the Islamic Republic of Pakistan, 1973, which is reproduced as under:-- "50. Taxes on the capital value of the assets, not including taxes on immovable property."
[emphasis supplied]
6. It is a settled proposition that a matter during proceedings cannot be taken to be past and closed transaction, therefore, if agricultural income tax is paid during appeal before Appellate Tribunal, the effect of charging provisions, in the Section 111, would be obliterated. So far, the contention of learned Legal Advisor for applicant-department of imposing the penalties is concerned, we concur with the decision of the learned Appellate Tribunal that penalties or default surcharge for late payment of agriculture tax, can only be imposed under the relevant provincial law, levying tax on agriculture income.
7. In view of above, instant Reference Application is decided against the applicant-department.
8. Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 133(5) of the Ordinance of 2001.