Pakistan: Separate Notice/Proceedings u/s 111 of the Income Tax Ordinance, 2001 before Amendment u/s 122 of the Ordinance

Background:

The amendment process under Section 122 of the Income Tax Ordinance, 2001, has been a focal point of judicial scrutiny. Both the Lahore High Court and the Supreme Court of Pakistan have consistently emphasized the mandatory requirement of issuing a prior notice under Section 111 before adding unexplained income or assets to a taxpayer’s taxable income. Historically, tax authorities often bypassed this requirement by directly invoking Section 122, leading to legal challenges and subsequent reversals by appellate forums. Recent judicial rulings aim to reinforce procedural fairness and safeguard taxpayer rights:

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Procedural Requirements and Judicial Precedents

The Federal Board of Revenue (FBR) has formalised the procedural sequence in response to judicial directives. The circular refers to multiple case laws establishing that:

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1. Separate Notice under Section 111 is Mandatory

• In Zubair Khan v. CIR Jhelum Zone (2024 PTD 1112), the Lahore High Court ruled that proceedings under Section 122 cannot commence unless a prior notice under Section 111 is served to the taxpayer.

• This principle was further reinforced in CIR Faisalabad v. Faqir Hussain (2019 PTD 1828) and CIR Multan v. Falah ud Din Qureshi (2021 PTD 192), which affirmed the mandatory nature of issuing a separate notice under Section 111.

2. Supreme Court’s Ruling in the Millat Tractors Case

• In CIR v. Millat Tractors Ltd (2024 SCMR 700), the Supreme Court categorically held that no addition under Section 111 is valid unless the proceedings are initiated and concluded through a separate notice under that section.

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Step-by-Step Compliance as Mandated by the Circular

To ensure adherence to judicial principles, the FBR has instructed tax officers to follow a strict procedural framework:

1. Issuance of Show Cause Notice
   
   • If an assessing officer believes Section 111 applies, a specific show cause notice under that section must be issued.
2. Speaking Order under Section 111
   
   • Upon receiving the taxpayer’s response, a reasoned (speaking) order under Section 111 must be passed, specifying the relevant clause under which the income or asset addition is being made.
3. Subsequent Notice under Section 122(9)
   
   • Only after finalizing the order under Section 111 can the officer proceed with issuing a show cause notice under Section 122(9), confronting the taxpayer with findings from the Section 111 order.
4. Final Speaking Order under Section 122
   
   • A detailed speaking order under Section 122 must be issued, ensuring compliance with the Supreme Court’s ruling.

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Reference/ Citation

C.No. 1(76)SS(A&A)_2023 dated 13-Dec-2024 - Procedure for amendment US 111 ITO 2001 

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