Mandatory Notices for Assessing Unexplained Income or Assets

In a series of appeals, the Supreme Court of Pakistan addressed key issues concerning the procedural requirements for issuing notices under Sections 111 and 122 of the Income Tax Ordinance, 2001. The appeals, filed by the Commissioner Inland Revenue, challenged the decisions of the Lahore High Court, which had favored the taxpayers, including prominent companies such as M/s Millat Tractors Limited and others.

Key Issues:

Necessity of Separate Notice under Section 111: The core issue was whether a separate and specific notice under Section 111 is required for assessing unexplained income or assets, or if a notice under Section 122(9) suffices to initiate proceedings.

Interpretation and Application of Section 111 and Section 122: The Court examined whether the proceedings under Section 111 need to be concluded before action can be taken under Section 122 based on the definite information derived from Section 111 inquiries.

Impact of the 2021 Explanation to Section 111: The Explanation added in 2021, and further amended in 2022, purported to clarify that no separate notice under Section 111 is required if the necessary details are covered under a notice issued under Section 122(9).

Case Law and Legal Principles: The Court referred to several precedents, including Commissioner Inland Revenue v. Faqir Hussain (2019 PTD 1828) and Commissioner Inland Revenue v. Bashir Ahmed (2021 SCMR 1290), emphasizing the need for a specific notice under Section 111 to be issued first.

Court's Conclusion: The Supreme Court upheld the decisions of the Lahore High Court, concluding that:

Separate Notice Requirement: A specific notice under Section 111 is mandatory and must precede any proceedings under Section 122, especially when assessing unexplained income or assets. The Court clarified that even if notices under Sections 111 and 122(9) are issued simultaneously, the proceedings under Section 111 must be finalized first.

Prospective Application of the Explanation: The Explanation added to Section 111 in 2021, which aimed to negate the need for a separate notice, does not apply retrospectively. It cannot affect tax years before its enactment and does not supersede the procedural requirements established in prior jurisprudence.

Definite Information Criterion: The information gathered under Section 111 can only be considered "definite information" for the purposes of amending an assessment under Section 122 after the conclusion of Section 111 proceedings.

This judgment underscores the necessity of adhering to procedural safeguards in tax assessments, ensuring that taxpayers are duly informed and given the opportunity to respond to specific allegations before any adverse actions are taken.

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