Cir Multan vs M/S Magna Processing Industries Pvt Ltd

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

ITR No.189 of 2025

The Commissioner Inland Revenue, Zone-II, LTO, Multan Versus M/s Magna Processing Industries (Pvt.) Limited, Faisalabad

JUDGMENT

Date of hearing: 01.10.2026.

Applicant by: Malik Muhammad Shahzad Awan, Advocate.

Respondent by: Mr. Amjad Javed Hashmi, Advocate.

MUHAMMAD SAJID MEHMOOD SETHI, J.:- Through instant Reference Application under Section 133 of the Income Tax Ordinance, 2001 (“the Ordinance of 2001”), following questions of law, asserted to have arisen out of impugned order dated 12.09.2025, passed by learned Appellate Tribunal Inland Revenue of Pakistan, Division Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:-

1.Whether the learned Appellate Tribunal Inland Revenue failed to appreciate the legislative intent and the remedial nature of Section 122(5A) in curbing revenue loss arising out of incorrect assessments, including misapplied apportionment of expenditure in violation of Section 67 of the Income Tax Ordinance, 2001?

2.Whether under the facts and in the circumstances of the case, the learned Appellate Tribunal Inland Revenue was justified to vacate the order passed under Section 122(5A) without observing that the assessing officer has correctly applied the common expenses ratio as per FTR / NTR income according to the provision of Section 67 of the Income Tax Ordinance, 2001 read with Rule 13 of the Income Tax Rules, 2002?

2.Briefly stated, the respondent is a private limited company engaged in manufacturing, processing and export of textile products. It derives income from exports under the Final Tax Regime (“FTR”)

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and from processing and printing services provided to local textile manufacturers under the Normal Tax Regime (“NTR”). Its return for Tax Year 2021, filed on 31.12.2021, was deemed to be an assessment under Section 120(1) of the Ordinance. The Assessing Officer subsequently formed the opinion that the assessment was erroneous insofar as prejudicial to the interest of revenue and issued a show- cause notice under Section 122(9) read with Section 122(5A), followed by reminders. After receiving the respondent’s reply, he passed order dated 02.05.2025 under Section 122(5A), creating demand of Rs.36,872,084/-, principally on account of re- apportionment of common expenses between FTR and NTR income under Section 67 read with Rule 13 of the Income Tax Rules, 2002, besides levy of Workers Welfare Fund. Before the learned Appellate Tribunal, the respondent contended, inter alia, that the proceedings under Section 122(5A) had been initiated through roving and fishing inquiries by calling for sales invoices, export GDs, ledgers, fixed asset details, withholding tax particulars and other information; that the basis ultimately adopted for apportionment had not been specifically confronted; and that the common expense ratio of 79.632% for FTR and 20.368% for NTR lacked a reasonable basis. The respondent relied upon its alternative ratio of 67.52% for exports and 32.48% for local processing, calculated by excluding raw material consumption in determining export gross profit, and upon FBR Circular No.20 of 1992. Objection was also taken to the apportionment of an insurance claim of Rs.33,059,118/- relating to loss of grey cloth, which according to the respondent pertained exclusively to raw material used for exports under FTR. The learned Appellate Tribunal accepted these contentions and vacated the assessment, finding that the proceedings under Section 122(5A) travelled beyond its statutory scope and that the re-apportionment of expenditure was based upon assumptions rather than a demonstrated factual basis.

3.Learned counsel for the applicant-department contends that Section 122(5A) of the Ordinance of 2001 is a remedial provision

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intended to protect revenue from erroneous assessments and that the Assessing Officer correctly applied the common expense ratio under Section 67 read with Rule 13 and the learned Appellate Tribunal failed to give due effect to the statutory scheme and the legislative object underlying Section 122(5A). Conversely, learned counsel for the respondent-taxpayer supports the impugned order and submits that the findings of the learned Appellate Tribunal are factual and have not been shown to be perverse or based on misreading or non-reading of material evidence so as to convert the factual controversy into a question of law.

4.We have heard learned counsel for the parties and examined the record with their assistance. Before addressing the proposed questions, it may be observed that jurisdiction under Section 133 of the Ordinance of 2001 is confined to a question of law arising out of the order of the learned Appellate Tribunal. The learned Appellate Tribunal is the final forum of fact and this Court does not sit as a second appellate forum to reappraise evidence, reconsider computations or substitute one factual methodology for another. This principle has also been reiterated by this Court in Commissioner Inland Revenue, Zone-II, RTO, Faisalabad v. Messrs Chawla Enterprises, Faisalabad (2024 PTD 368). Interference is warranted only where a finding is perverse, based on no evidence, founded upon misreading or non-reading of material evidence, or otherwise gives rise to a legal question. A factual challenge does not become a question of law merely because it is couched in the language of a statutory provision.

5.The first question essentially concerns the scope of Section 122(5A) of the Ordinance of 2001. The provision permits amendment or further amendment of an assessment where the Commissioner considers that it is erroneous insofar as prejudicial to the interest of revenue. The statutory conditions are cumulative: the assessment must be erroneous and the error must be prejudicial to revenue. Its remedial character does not enlarge the jurisdiction or dispense with the

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requirement that the alleged error have a demonstrable factual and legal foundation. The provision cannot be converted into an unrestricted authority to reopen a deemed assessment and thereafter discover an error through a roving or fishing inquiry. There is a material distinction between correcting an error already demonstrable from the assessment record and undertaking further investigation to ascertain whether an error may exist. The principle is consistent with the guidance of the Hon’ble Supreme Court in Commissioner Inland Revenue, Zone Bahawalpur, Regional Tax Office, Bahawalpur v. Messrs Bashir Ahmed (deceased) through LRs (2021 SCMR 1290), wherein the Department could not proceed on the premise that the requisite factual basis for amendment already existed when the statutory process necessary to establish that basis had not been completed. Likewise, in Commissioner Inland Revenue v. Messrs Khan CNG and Filling Station and others (2013 PTD 884), this Court distinguished between information already established and a conclusion generated through further departmental calculation or processing. These principles, though arising in the context of Section 122(5), reinforce that the power under Section 122(5A) cannot be employed merely to undertake an inquiry for discovering or constructing the very error sought to be made the basis of amendment.

6.The learned Appellate Tribunal examined the show-cause notice and found that it called for, inter alia, local sales invoices, export GDs, details of fixed-asset additions, withholding-tax particulars, ledgers, expenditure records and advance-tax particulars. It concluded that the proceedings were aimed at collecting fresh information to reconstruct the assessment, rather than correcting an error already apparent from the record. That finding is borne out by the record and has not been shown to be perverse. Section 122(5A) does empower the Commissioner to make such enquiries as he considers necessary; however, an enquiry to verify an identified error is materially different from an enquiry undertaken to establish the error itself. The Tribunal further found that the basis ultimately

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adopted for re-apportionment was not put to the taxpayer. This, too, is a finding of fact, and the department has pointed to no material that was ignored by the Tribunal. This aspect assumes significance in view of the law laid down by the Hon’ble Supreme Court in Commissioner Inland Revenue v. Messrs RYK Mills (2023 SCMR 1856), that a taxpayer must be confronted with the specific allegations and the grounds forming their basis and that adjudication cannot travel beyond the case set out in the show-cause notice; where further inquiry or verification gives rise to a new or materially different basis for adverse action, a fresh or supplementary show-cause notice may become necessary. The requirement of a meaningful opportunity of hearing necessarily extends to the material basis upon which the adverse determination is ultimately founded. The applicant- department has neither demonstrated any material finding ignored by the learned Appellate Tribunal nor shown how the remedial object of Section 122(5A) could dispense with these requirements. We, therefore, find no error of law in the Tribunal’s conclusion that, in the circumstances of the case, the proceedings travelled beyond the permissible scope of Section 122(5A).

7.The second question concerns apportionment of expenditure under Section 67 of the Ordinance of 2001. The provision requires expenditure relating to more than one activity or source of income to be apportioned on a reasonable basis, having regard to the relative nature and size of the activities to which the expenditure relates. Rule 13 does not, in every circumstance, convert a particular numerical ratio into an inflexible statutory formula. The Hon’ble Supreme Court, in Coca Cola Pakistan Ltd. (The Coca-Cola Export Corporation, PB), Lahore v. Commissioner Inland Revenue, Large Taxpayers Office, Lahore (PLD 2026 Supreme Court 197), has recognized that Section 67 contemplates a reasonable basis having regard to the relative nature and size of the activities and that Rule 13 is not an exclusive method by which every other reasonable basis must necessarily be rejected.

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8.The learned Appellate Tribunal examined the competing methodologies and found that the Assessing Officer had not identified any particular expenditure attributable to local processing or export activity and had re-apportioned the expenses on assumptions without demonstrating their relationship with the relative nature and size of the respective activities. It specifically considered stores and spares, depreciation, repairs and gas and found production-based allocation, in meters of cloth, more relevant to the nature of those expenses. It also considered the respondent’s ratio of 67.52% for exports and 32.48% for local processing, calculated by excluding direct raw- material consumption in determining export gross profit, and its reliance upon FBR Circular No.20 of 1992. The Tribunal found that the Department had failed to establish why the respondent’s method was unreasonable or why its own common ratio necessarily represented the relative nature and size of the activities. These are findings arising from examination and appreciation of the material before the Tribunal.

9.The applicant-department’s assertion that the Assessing Officer “correctly applied” the common expense ratio, therefore, begs the very question determined by the learned Appellate Tribunal. Whether a particular expense should be allocated on the basis of turnover, gross profit, production, or some other parameter depends upon the nature of that expense and the activities to which it relates. The learned Tribunal did not hold that the Department was altogether precluded from apportioning expenditure, nor that the taxpayer’s allocation was immune from scrutiny; rather, it found that the particular re- apportionment undertaken by the Assessing Officer lacked a demonstrated and reasonable factual basis. In the absence of perversity, misreading, non-reading or any other legal infirmity, this Court cannot, in reference jurisdiction, substitute the Assessing Officer’s preferred methodology for the factual determination of the learned Appellate Tribunal. The finding, therefore, remains one of fact.

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10.Consequently, Question No.1, insofar as it seeks to sustain the exercise of jurisdiction under Section 122(5A) merely on the basis of its remedial object, is answered in the negative, against the applicant- department and in favour of the respondent-taxpayer. Question No.2, being directed essentially to reappraisal of factual findings concerning the basis of apportionment, the common expense ratio and the nature and allocation of particular expenditure, does not give rise to a question of law within the scope of Section 133 of the Ordinance of 2001. Accordingly, to that extent, we decline to exercise advisory jurisdiction.

Resultantly, this Reference Application is decided against the applicant-department.

11.Office shall send a copy of this judgment under the 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.*