Cir Sahiwal vs M/S Bano Feeds Pv Tltd

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

ITR No.108 of 2025

Commissioner Inland Revenue, Okara Zone, Regional Tax Office, Sahiwal

Versus

M/s Bano Feeds (Pvt.) Limited, Pakpattan

JUDGMENT

Date of hearing: 21.09.2026.

Applicant by: Mr. Abdul Razzaq Raja, Advocate. Respondent by: M/s. Rehan Ahmad Khan, Furqan Ahmad Khan and Anwaar Khalid, Advocates.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 (“the Ordinance of 2001”), following question of law, urged to have arisen out of impugned order dated 29.05.2025, passed by learned Appellate Tribunal Inland Revenue, Multan Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:-

1.Whether in the facts and circumstances of the case, the learned ATIR was justified to observe that “submission of the A.R. regarding passing of order u/s 121 instead of 122 of the Ordinance, carries weight” by ignoring that in section 177(10) of the Ordinance the word “may” proceed to make best judgment assessment under Section 121 of this Ordinance has been used?

2.Whether in the facts and circumstances of the case, the learned ATIR was justified to ignore the provisions of clause (b) of sub section (2) of Section 126 of the Ordinance, 2001 and whether the word “may” used in Section 177(10) is directory or mandatory?

3.Whether in the facts and circumstances of the case, the learned ATIR was justified to hold that a separate and specific notice u/s 111 had not been issued and that proceedings were not finalized in conformance with the ratio held in case law cited as 2024 PTD

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483 (CIR v. M/s Millat Tractors Ltd. & others) – contrary to the factual position and in total disregard of the assessing officer’s findings given in the order?

2.Brief facts of the case are that the respondent-company’s case for Tax Year 2020 was selected for audit under Section 177 of the Ordinance on 08.11.2022. Notice dated 24.11.2022 was issued requiring production of accounts, documents and record, but the Company failed to comply. Despite such non-production, an audit report under Section 177(6) was issued on 13.08.2024, followed by notice under Section 111(1) and, ultimately, an ex-parte amended assessment under Section 122(1) dated 28.02.2025, creating a tax demand of Rs.226,494,467/-. The respondent-company challenged the assessment before the learned Appellate Tribunal, which, vide order dated 29.05.2025, accepted the appeal and deleted the assessment, holding, inter alia, that in view of the failure to produce the requisite record, the Assessing Officer ought to have proceeded under Section 177(10) read with Section 121 rather than under Section 177(6) read with Section 122(1). Hence, the present Reference Application.

3.Learned counsel for the Applicant-Department contended that the word “may” employed in Section 177(10) is directory and confers discretion upon the Commissioner to resort to best judgment assessment under Section 121; it does not make such course mandatory or exclude the otherwise available power under Section 122(1). He argues that the Assessing Officer had proceeded after issuance of the audit report and, therefore, the assessment could not be annulled merely because the taxpayer had failed to produce the record. He further relies upon Section 126(2)(b), submitting that any defect in the assessment was, at most, an irregularity which could not invalidate an order substantially conforming to the Ordinance. He contends that technicalities should not defeat substantial justice, particularly when the taxpayer itself had persistently failed to comply with the notices.

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4.Conversely, learned counsel for the Respondent-Taxpayer supported the impugned order and submitted that, in view of the taxpayer’s failure to produce the requisite record, the specific mechanism provided under Section 177(10) was attracted, whereby the Commissioner could proceed under Section 121. It was contended that the non-obstante clause in Section 177(10) overrides the ordinary audit mechanism under Section 177(6) in such circumstances and, therefore, the Assessing Officer could not bypass the said provision and proceed under Section 122(1).

5.We have considered the submissions and examined the record as well as relevant provisions of the Ordinance of 2001. Questions No.1 & 2 are interlinked and are taken up together. Section 177(6) contemplates completion of audit before an audit report containing observations and findings is issued, whereas Section 177(6A) enables amendment of an assessment under Section 122 after issuance of such audit report. Section 177(10), however, specifically addresses the contingency where a taxpayer fails to produce, during audit, the accounts, documents and records required to be maintained or any other relevant record or evidence required for the purpose of audit or determination of income and tax. Significantly, it opens with a non- obstante clause, namely, “Notwithstanding anything contained in subsections (2) and (6)”, and expressly provides that, in such circumstances, the Commissioner may proceed to make a best judgment assessment under Section 121. The provision, therefore, cannot be treated as an incidental or inconsequential part of the audit scheme.

6.It is not disputed that the respondent failed to produce the requisite accounts, documents and record in response to the notice issued under Section 177. The contingency expressly contemplated by Section 177(10) was, therefore, attracted. The mere fact that a document was thereafter issued under the description of an “audit report” cannot, by itself, determine the legal character of the proceedings or displace the specific statutory mechanism applicable to

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the admitted facts. The proceedings have to be examined according to their substance and in the context of the statutory scheme. Where the Legislature has prescribed a particular course for a defined contingency, that course cannot be rendered ineffective merely by adopting a different description for the proceedings. This conclusion rests on settled principles of interpretation and of fiscal jurisprudence:

(a)Statute to be read as a whole. Every word and provision is to be given effect, and a construction that renders any part redundant or ineffective is to be avoided. The Hon’ble Supreme Court applied this principle in Messrs Islamabad Electric Supply Company Limited (IESCO) v. The Appellate Tribunal Inland Revenue (H.Q.), Islamabad through Chairman and others (2023 SCMR 1516). A reading of Section 177 that permitted the Revenue to ignore sub-section (10) whenever it found Section 122(1) more convenient would leave the non-obstante clause without meaningful operation.

(b)Special provision prevails over general. Section 177(10) deals specifically with failure to produce record during audit, whereas Section 122(1) is the general power of amendment. The maxim generalia specialibus non derogant dictates that where the Legislature has made specific provision for a defined situation, the general power cannot be invoked to defeat it. The non- obstante clause reinforces this by expressly overriding sub- sections (2) and (6).

(c)Power to be exercised in the prescribed manner. Where a statute empowers an authority to do a thing in a particular way, it must be done in that way or not at all: Nazir Ahmad v. King- Emperor (AIR 1936 PC 253), a principle consistently followed by the superior courts in Pakistan. This rule has special force in taxation, where liability arises only under the authority of law (Article 77 of the Constitution of the Islamic Republic of Pakistan) and the taxing authorities are creatures of statute with no inherent powers.

(d)Audit as a statutory roadmap. The Hon’ble Supreme Court in Commissioner of Inland Revenue, Sialkot and others v. Messrs Allah Din Steel and Rolling Mills and others (2018 PTD 1444) recognized that the statutory provisions governing audit provide a mechanism and roadmap to be followed by the tax authorities.

7.The legislative significance of Section 177(10) is also reflected in the judgment of this Court in Commissioner of Income Tax v. Messrs Doaba Plastics Industries (Pvt.) Ltd. (2015 PTD 681), wherein the interrelationship of Sections 120, 121 and 177(10) was considered and the provision introduced through the Finance Act,

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2010, specifically providing for best judgment assessment where the taxpayer fails to produce the requisite record during audit, was noticed. The ultimate ratio of that case related to the legal position applicable to an earlier period and is, therefore, distinguishable from the present case; nevertheless, the judgment reinforces the significance of the specific statutory mechanism introduced through Section 177(10).

8.The argument founded upon the word “may” does not alter the above position. The expression ordinarily denotes discretion; however, the nature and extent of that discretion have to be gathered from the provision read as a whole. In Section 177(10), the discretion is as to whether, upon the failure contemplated therein, the Commissioner should proceed to make a best judgment assessment under Section 121. Such discretion cannot reasonably be construed as an unrestricted power to disregard the specific statutory mechanism and, notwithstanding the non-production of the record, resort to Section 122(1) as an alternative route. Such construction would substantially dilute the effect of the opening non-obstante clause and the specific legislative treatment prescribed for failure to produce the record during audit. The use of the word “may”, therefore, cannot be understood so as to render the remainder of the provision redundant.

9.The contention based upon Section 126(2)(b) is equally not sustainable. The protection afforded by that provision is available where, notwithstanding any mistake, defect or omission, the order is “in substance and effect, in conformity with this Ordinance”. It may protect an order from a mere procedural or formal defect where the substance of the statutory requirements has otherwise been complied with; it cannot, however, validate an assessment framed by adopting a statutory course other than that specifically attracted by the facts of the case. The present matter is not one of an erroneous citation of a provision or a curable procedural defect. The assessment was framed under Section 122(1) notwithstanding the admitted non-production of the record which attracted the specific provisions of Section 177(10).

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Section 126(2)(b), therefore, cannot be invoked to cure the consequence of bypassing the statutory mechanism itself.

10.Nor can the principle that technicalities should not defeat substantial justice be invoked to sustain an assessment made contrary to the statutory scheme. The taxpayer’s failure to produce the requisite record may entail consequences under the Ordinance, but such default does not enlarge the jurisdiction available to the Assessing Officer or dispense with the statutory requirements governing the exercise of that jurisdiction. The Revenue is, in any event, not left without a remedy. Section 177(10), read with Section 121, expressly provides a statutory mechanism for dealing with the failure to produce the accounts, documents and records required for audit. The existence of that mechanism reinforces the conclusion that the taxpayer’s default cannot, by itself, justify bypassing the course expressly contemplated by Section 177(10) and proceeding under Section 122(1) in the manner adopted in the present case.

11.Question No.3 concerns the proceedings under Section 111 and the applicability of the ratio laid down by the Hon’ble Supreme Court in Commissioner Inland Revenue, Lahore v. Messrs Millat Tractors Limited, Lahore and others (2024 SCMR 700 = 2024 PTD 483). The said judgment examined the legal position prevailing prior to the Explanation introduced in Section 111 through the Finance Act, 2021 and held that, before an assessment could be amended under Section 122 on the basis of Section 111, proceedings under Section 111(1) were required to be initiated through a separate notice, the taxpayer was required to be confronted with the relevant information and grounds and afforded an opportunity to explain the same, and the proceedings were required to culminate in an opinion of the Commissioner. Such opinion would constitute the requisite definite information for purposes of consequential action under Section 122. The Hon’ble Supreme Court further held that even where notices under Sections 111 and 122(9) were issued simultaneously, the proceedings under Section 111 had to be finalized before the

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proceedings under Section 122 could be given effect. Since the present matter relates to Tax Year 2020, the legal position applicable prior to the aforesaid Explanation is attracted. The same principle was also recognized by this Court in The Commissioner Inland Revenue, Zone-II, Regional Tax Office, Lahore v. Shazia Zafar (2022 PTD 1942), following Commissioner Inland Revenue Zone Bahawalpur, Regional Tax Office, Bahawalpur v. Messrs Bashir Ahmed (deceased) through LRs. (2021 PTD 1182).

12.The basic requirement of notice and opportunity before making an addition under Section 111 was also recognized by this Court in Commissioner of Income Tax, Special Zone, Corporate Region, Karachi v. Messrs Shaista Estate (Pvt.) Ltd. (2010 PTD 704), wherein an addition under Section 111(1)(c) was deleted as the requisite opportunity of hearing had not been afforded to the assessee. The distinction is material here, because the record of the present case does not support the factual finding of the learned Appellate Tribunal that no separate and specific notice under Section 111 had been issued. The assessment order expressly records that a show-cause notice under Section 111(1)(a) was issued on 10.02.2025, bearing IRIS Bar Code No.100000229205292. The notice specifically confronted the respondent with Other Liabilities of Rs.3,208,495/-, Trade Creditors/Payables of Rs.243,012,624/- and Advances/ Deposits/Accrued Expenses of Rs.14,115,755/-, pointed out the absence of supporting details and documentary evidence, invoked Section 111(1)(a), and called upon the respondent to explain the same. It further stated the proposed treatment of the amounts as income from other sources under Section 39 read with Section 111(1)(a).

13.The notice, therefore, was neither an omnibus notice nor a mere incidental reference to Section 111. It identified the amounts and the nature of the liabilities requiring explanation, specified the statutory basis of the proposed addition and afforded the respondent an opportunity to explain the same. The assessment order records that no compliance was made. Thereafter, the Assessing Officer expressly

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recorded that he had formed an opinion that Section 111(1)(a) was attracted and that such opinion was to constitute definite information for purposes of further action under Section 122. Significantly, the order contains a distinct heading “Order u/s 111(1)”, under which the amount of Rs.260,336,874/- was shown as unverified and the decision under clause (a) of Section 111(1) was recorded as “Dissatisfied/ Rejected”. Thus, the essential requirements identified in Millat Tractors’ case supra, namely, initiation of proceedings under Section 111 through specific notice, confrontation with the relevant information, opportunity to explain and formation of an opinion under Section 111(1), are reflected in the record of the present case.

14.It is true that the assessment order further states that, upon non- compliance, the proceedings would be finalized under Section 122 and refers to the respondent having been confronted in separate proceedings under Section 122. Such subsequent reference, however, cannot sustain the learned Appellate Tribunal’s factual conclusion that no separate notice under Section 111 had been issued, particularly when the notice dated 10.02.2025 is expressly available on record and the order dated 28.02.2025 records the consequential opinion under Section 111(1). The learned Appellate Tribunal, while applying the ratio of Millat Tractors’ case supra, therefore proceeded on a factual premise which is contradicted by the assessment record. The distinction is material: Millat Tractors requires the Section 111 proceedings to be separately initiated and concluded before consequential action under Section 122, in cases governed by the legal position considered therein. In the present case, that proceeding was in fact initiated, the respondent was confronted with the relevant information and afforded an opportunity to explain it, and, upon failure to respond, the Assessing Officer recorded his opinion under Section 111(1). The factual basis upon which the learned Appellate Tribunal applied the ratio of Millat Tractors’ case, therefore, does not exist.

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15.For the foregoing reasons, the learned Appellate Tribunal was justified in holding that the failure to produce the requisite record attracted the statutory mechanism contained in Section 177(10), and its approach on Questions No.1 and No.2, to that extent, calls for no interference. However, its finding on Question No.3 that no separate and specific notice under Section 111 had been issued is not borne out from the record. The proceedings under Section 111 were specifically initiated and culminated in an express opinion of the Assessing Officer before the consequential action under Section 122.

16.Accordingly, Question No.1 is answered in the affirmative, in favour of the respondent-taxpayer and against the applicant- department. In respect of Question No.2, the learned Appellate Tribunal was justified in not accepting the plea based upon Section 126(2)(b); however, the word “may” employed in Section 177(10) is directory and confers discretion upon the Commissioner whether or not to proceed to make a best judgment assessment under Section 121. Such discretion does not, however, extend to treating Section 177(10) as inapplicable or to bypassing the statutory mechanism attracted by the contingency contemplated therein. Question No.2 is, therefore, answered accordingly, in favour of the respondent-taxpayer and against the applicant-department. Question No.3 is answered in the negative, in favour of the applicant-department and against the respondent-taxpayer.

17.Consequently, the instant Reference Application is answered in the above terms. The impugned order dated 29.05.2025 passed by the learned Appellate Tribunal is upheld insofar as its decision on Questions No.1 and No.2 is concerned. To the extent the learned Appellate Tribunal recorded a finding that no separate and specific notice under Section 111 had been issued, the said finding is set aside. The correction of the said finding, however, does not affect the ultimate result of the appeal before the learned Appellate Tribunal, the assessment having already been deleted on the basis of its conclusions regarding Sections 177(10), 121 and 122.

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18.Office shall send a copy of this judgment under seal of the Court to the learned Appellate Tribunal in terms of Section 133(8) of the Ordinance of 2001.

(Sultan Tanvir Ahmad) (Muhammad Sajid Mehmood Sethi) Judge Judge

APPROVED FOR REPORTING

Judge Judge

*A.H.S.*