LHC Rejects FBR’s Income Tax Reference

LHC Rejects FBR’s Income Tax Reference

In a significant ruling, a division bench of the Lahore High Court (LHC) dismissed an income tax reference filed by a Commissioner Inland Revenue of the Federal Board of Revenue (FBR) under Section 133(1) of the Income Tax Ordinance, 2001.

The reference filed before the LHC, challenged an order issued by the Appellate Tribunal Inland Revenue, Lahore, on September 27, 2018, which favored the respondent, a business entity operating departmental stores in Lahore and Rawalpindi.

The case stemmed from the respondent’s e-filed income tax return for the 2014 tax year, declaring a loss of Rs. 15,734,624. The FBR had selected the respondent’s case for audit under Section 214-C of the Ordinance. Subsequently, the deemed assessment was amended under Section 122(1), revising the respondent’s income to Rs. 880,500,469. Dissatisfied with this assessment, the respondent filed an appeal, leading the Commissioner Inland Revenue (Appeals) [CIR (Appeals)] to partially remand the case. The respondent escalated the matter to the Appellate Tribunal, which ultimately ruled in its favor, deleting several contested additions.

The petitioner argued before the LHC that the Appellate Tribunal should have remanded the case back to the CIR (Appeals) instead of deciding it directly. However, the court rejected this contention, affirming the Tribunal’s authority as the final fact-finding forum to resolve the matter independently.

Among the key deletions by the Appellate Tribunal were:

• Rs. 252,369,772 under Section 39(3), where the Tribunal found that the Deputy Commissioner Inland Revenue (DCIR) had inconsistently applied standards by granting relief in a similar case but rejecting the respondent’s verified transaction records.

• Rs. 5,111,393 under Section 21(a), where sales tax was incorrectly treated as a tax on profits rather than a levy on sales.

• Rs. 14,705,000 and Rs. 13,486,773 disallowances, which were set aside due to the absence of a prior show cause notice.

• Rs. 7,500,000 added under Section 111, which was invalidated for lack of a separate notice.

Furthermore, the court dismissed the petitioner’s argument regarding a donation of Rs. 3,216,530 to Bahria Dastarkhawn, which was treated as covered under Section 61 of the Ordinance. The court clarified that determining whether the recipient qualifies as a registered non-profit organization under Section 2(36) involves factual findings beyond its jurisdiction in reference proceedings.

The LHC concluded that the Appellate Tribunal’s findings were grounded in factual determinations, leaving no substantive legal question for the court to address. The court emphasized that the Tribunal acted within its jurisdiction and authority in deciding the matter conclusively. Consequently, the reference filed by the FBR was dismissed for lack of merit.

This decision underscores the role of the Appellate Tribunal as the final arbiter of facts in tax disputes and highlights the importance of adhering to procedural requirements in tax assessments.