Cir Multan vs M/S A & Z Oils Pvt Ltd

Stereo. H C J D A-38.

JUDGMENT SHEET

IN THE LAHORE HIGH COURT, MULTAN BENCH,

MULTAN

JUDICIAL DEPARTMENT

ITR No.177 of 2025

The Commissioner Inland Revenue, Zone-IV, Large Taxpayers Office, Multan Versus M/s A & Z Oils (Pvt) Limited, Multan

JUDGMENT

Date of hearing: 13.10.2026.

Applicant by: Malik Muhammad Shahzad Awan, Advocate.

Respondent by: M/s Furqan Ahmad Khan, Rehan Ahmad Khan & Anwar 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 questions of law, stated to have arisen out of impugned order dated 21.07.2025, passed by learned Appellate Tribunal Inland Revenue, Government of Pakistan, Division Bench, Multan (“Appellate Tribunal”), have been pressed and argued for our opinion:-

1.Whether, under the facts and circumstances of the case, the Appellate Tribunal was justified to delete the demand raised under audit observations solely on the ground that no separate notice under Section 111 of the Ordinance was served upon the taxpayer, although the audit observations were confronted to the taxpayer through the audit report in terms of Section 177(6) of the Ordinance?

2.Whether, under the facts and circumstances of the case, a separate notice under Section 111 of the Ordinance is required to be issued after confronting the audit report to the taxpayer in terms of Section 177(6) of the Ordinance?

BACKGROUND

2.The assessing authority made additions on the basis of observations recorded in audit proceedings under section 177 of the

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Ordinance. The respondent-taxpayer challenged them before the appellate fora, contending, inter alia, that the statutory requirements governing an addition under section 111 had not been met. The dispute also involved a disallowance relating to purchases and an adjustment of the Workers’ Welfare Fund (“WWF”). The Tribunal found the additions unsustainable in view of the material on record and reasoning adopted by the assessing authority. On the purchases, it observed that the authorized representative had furnished a detailed reconciliation both during assessment and before the Tribunal. The assessing authority had instead compared purchases of Rs.40,000,000/- declared in the income tax return with the figures in Annexure-A of the sales tax returns, and on that basis made an addition of Rs.288,000,000/-. The Tribunal deleted the addition. On the WWF, it noted that the Commissioner (Appeals) had observed that refundable tax was available and had been adjusted by the department while issuing refunds. As the department denied having made any such deduction, the Tribunal directed verification of the claim and observed that, if no deduction had been made, recovery proceedings could be initiated in accordance with law.

CONTENTIONS

3.Learned counsel for the applicant-department submits that the Tribunal erred in deleting the demand for want of a separate notice under section 111. He contends that the audit observations had already been confronted to the taxpayer through the audit report under section 177(6), and that the respondent was fully aware of the objections, and that no further notice under section 111 was required.

4.Learned counsel for the respondent-taxpayer supports the impugned order. He submits that the Tribunal correctly distinguished audit proceedings under section 177 from the requirements governing an addition under section 111, and that communication of an audit report cannot, by itself, discharge the procedural requirements of a distinct substantive provision. He adds that the assessing authority failed to consider the reconciliation and supporting documents relating

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to purchases, and that the direction on the WWF merely requires factual verification.

QUESTIONS FOR DETERMINATION

5.Arguments heard and the available record perused. The two referred questions are interrelated and are considered together: whether communication of an audit report under section 177(6) dispenses with a separate notice under section 111 when the assessing authority proposes an addition under the latter provision, and, if not, what follows for the demand. Since the impugned order also rests on findings concerning purchases and the WWF, which no referred question squarely challenges, the Court considers whether those findings would in any event stand.

OBSERVATIONS OF THE COURT

A. Scope of the reference jurisdiction

6.Under section 133 this Court answers questions of law arising from the order of the Tribunal. The Tribunal is the final fact-finding forum, and this Court does not undertake an unrestricted rehearing of factual controversies merely because the department disagrees with the Tribunal’s assessment of documents. Interference is warranted where the Tribunal has applied an incorrect legal test, disregarded a binding statutory requirement, or reached a conclusion that no reasonable tribunal could have reached on the record. Within these limits the Court examines the two questions.

B. The statutory scheme

7.Section 177 provides the framework for audit. It authorizes examination of the taxpayer’s records, communication of audit observations in an audit report, and an opportunity to respond. If the Commissioner is not satisfied with the explanation, he may proceed to amend the assessment under section 122, after giving the taxpayer an opportunity of being heard. Audit is therefore an inquisitorial, fact- gathering stage. Section 111, by contrast, is a substantive charging provision of a deeming nature. Where the conditions it specifies are met, and the Commissioner forms the opinion it requires, an amount

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treated as unexplained income, investment, money or expenditure is included in the taxpayer’s income. Its consequences are onerous, and a deeming provision of this kind must be applied in strict conformity with its own conditions and procedure.

8.The two provisions thus perform different functions. An audit observation may disclose a discrepancy or justify further inquiry; the legal consequence proposed to be drawn from it must separately satisfy the provision under which the addition is made. The existence of an audit discrepancy and the establishment of a sustainable addition under section 111 are not the same thing. Before an addition under section 111 is made, the authority must identify the nature of the allegation, the amount sought to be treated as unexplained and the statutory basis for the proposed treatment, and the taxpayer must be given an effective opportunity to explain and to produce material. The requirement of notice is not a formality. It is the means by which the taxpayer learns the case to be answered and by which a meaningful response is made possible. It reflects the principle of audi alteram partem, which is also a facet of the right to due process under Articles 4 and 10A of the Constitution.

C. The binding authority of the Supreme Court

9.The Supreme Court has addressed the closely related relationship between section 111 and the amendment proceedings under section 122. In Commissioner Inland Revenue, Lahore v. Messrs Millat Tractors Limited, Lahore and others (2024 SCMR 700), following the judgment in Commissioner Inland Revenue Zone Bahawalpur, Regional Tax Office, Bahawalpur v. Messrs Bashir Ahmed (deceased) through LRs (2021 SCMR 1290), the Court held that a separate notice and proceedings under section 111 are required before an addition of unexplained income or assets is made, and that a notice under section 122(9) is not a substitute. Notices under the two provisions may be issued simultaneously, but proceedings under section 111 must be completed first, and the explanation inserted in section 111 by the Finance Act, 2021 and amended in 2022 was held

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not to dispense with the separate notice for the period before it came into force.

10.The principle underlying these decisions is that a communication made for the purposes of one stage of the proceedings cannot discharge the requirements of a distinct statutory provision merely because both relate to the same assessment. That reasoning applies with equal force to an audit report under section 177(6). If a notice under section 122(9), which is itself a statutory show-cause notice preceding amendment, cannot stand in for a notice under section 111, an audit report, which merely communicates audit observations and does not itself invoke section 111, cannot do so either. At the same time, the sufficiency of a communication is judged by its substance and not by its title. A communication may suffice only if it expressly invokes section 111, states the grounds and the amount, and affords the taxpayer a real opportunity to respond. The department cannot rely on the mere fact that audit observations were communicated.

D. Answer to the referred questions

11.The department’s contention rests on the proposition that confrontation under section 177(6) suffices, in every case, to satisfy section 111. That cannot be accepted as an inflexible rule, for the reasons given. The applicant has not shown that the audit report in this case invoked section 111, stated its grounds, or called for an explanation on that footing, and the Tribunal found that the requirement of notice had not been met. That finding is not shown to be perverse, and the Tribunal’s insistence on compliance with the statute discloses no error of law.

12.The first and second questions are accordingly answered against the applicant-department. A separate notice under section 111 is required before an addition is made under that provision, and an audit report under section 177(6) is not a substitute for it. This answer is subject to the law applicable to the particular year and to the contents of the notices and communications in the case. The Tribunal was

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justified in refusing to sustain an addition where compliance with the statutory requirements had not been established.

E. The purchases addition

13.Although no referred question squarely challenges it, the Tribunal’s deletion of the purchases addition independently supports the impugned order and merits consideration. A difference between figures in separate tax returns may call for explanation and verification, but it does not by itself establish that the difference represents unexplained income or purchases liable to be added. The assessing authority is required to examine the nature of the entries, their accounting treatment, the relevant period and the supporting documents before concluding adversely. The Tribunal recorded that the reconciliation, purchase ledgers and supporting documents had been furnished and that the assessing authority had summarily disregarded them without examining the books of account or the reply stated to have been filed and stamped by the department. A lawful assessment requires due consideration of the books and supporting evidence under the Ordinance, including section 174 to the extent relevant. Audited financial statements do not exclude scrutiny, but equally they cannot be set aside without a reasoned examination of the material. An assessment must rest on a proper appraisal of the record, not on an inference drawn from a partial comparison of figures. This is a finding of fact on the documentary material. No incorrect legal test, disregard of a statutory requirement or perversity has been shown, and there is therefore no ground for interference. The finding is confined to the material and reasoning before the Court and is not a general proposition that audited accounts or a reconciliation must be accepted without verification.

F. The WWF adjustment

14.The Tribunal noted the Commissioner (Appeals)’s observation that refundable tax was available and had been adjusted by the department in issuing refunds. As the department disputed any such deduction, the Tribunal directed verification of the claim without

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conclusively deciding the controversy for either side, or preserved the department’s right to initiate recovery proceedings if the deduction was found not to have been made. This direction requires verification of the record before any final consequence is drawn. It neither accepts the taxpayer’s claim conclusively nor restricts the department’s statutory powers, and no jurisdictional defect or error of law has been demonstrated.

G. Conclusion

15.The Tribunal’s findings, taken together, disclose a reasoned approach. It considered the objection under section 111, examined the reconciliation and supporting documents on purchases, and directed verification of the WWF adjustment. The department has not shown that the Tribunal adopted an incorrect legal test or that its order suffers from an error of law warranting interference under section 133.

16.For the foregoing reasons, both referred questions are answered in the affirmative i.e. against the applicant-department and in favour of the respondent-taxpayer.

17.Consequently, this Income Tax Reference is dismissed, and the impugned order dated 21.07.2025 passed by the learned Appellate Tribunal Inland Revenue of Pakistan, Division Bench, Multan, is maintained.

18.A copy of this judgment shall be sent to the learned Appellate Tribunal Inland Revenue under the seal of this Court in accordance with section 133(8) of the Ordinance.

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

APPROVED FRO REPORTING

Judge Judge *Sultan*