Commissioner Inland Revenue VS M/s ZEDAM International Pvt Ltd

JUDGMENT SHEET

IN THE ISLAMABAD HIGH COURT, ISLAMABAD

INCOME TAX REFERNECE NO. 163 OF 2025

Commissioner Inland Revenue Versus ZEDAM International (Private) Limited

PRESENT: Mr. Shazib Masud & Barrister Abdul Ahad Khokhar, Advocate for the Applicant.

Hafiz Muhammad Idrees & Syed Fareed Muhammad Bukhari, Advocate for the Respondent.

Date of Hearing: 06.10.2026.

SHAHRUKH ARJUMAND, J. This reference emanates from the judgment of the learned Appellate Tribunal Inland Revenue dated 18.12.2024, wherein the appeal filed by the respondent was accepted and the order passed by the assessing officer under the provisions of section 122(1) of the Income Tax Ordinance, 2001 was annulled.

2.Brief facts of the case are that the respondent is a private limited company engaged in the business of land development. It filed its return of income for the Tax Year 2018 (01.07.2017 to 30.06.2018), which attained the status of a deemed assessment under section 120 of the Income Tax Ordinance, 2001 (hereinafter referred to as “the Ordinance”). Subsequently, the case of the respondent was selected for audit under section 177 of the Ordinance and intimation to this effect was conveyed through IRIS on 27.11.2020. In furtherance thereof, notice under section 177(1) of the Ordinance was issued on 30.11.2020 requiring production of accounts, documents and information, followed by a reminder dated 08.09.2023. In response, the respondent sought immunity from audit by invoking Clause 105-A of Part IV of the Second Schedule to the Ordinance. The said contention was rebutted by the Department and the respondent was directed to participate in the audit proceedings and provide the requisite details.

Thereafter, a final notice (IDR) was issued on 21.05.2024, followed by the issuance of an audit report under section 177(6) of the Ordinance on 31.05.2024. Subsequently, a show cause notice under section 122(9) of the Ordinance was issued on 14.06.2024, requiring the respondent to furnish its explanation by 24.06.2024. The respondent submitted certain documents and information; however, the assessing officer, being unsatisfied with the explanation and material furnished, proceeded to amend the assessment under section 122 of the Ordinance and made various disallowances under different heads, thereby creating additional tax liability against the respondent for the Tax Year 2018. The assessment so framed was assailed by the respondent through an appeal before the learned Appellate Tribunal Inland Revenue (hereinafter referred to as “the Tribunal”). The Tribunal, after hearing the parties at length, accepted the appeal and annulled the order of the assessing officer. The Department, being aggrieved and dissatisfied with the said judgment, has preferred the instant Income Tax Reference before this Court with the following questions of law:

i. Whether in facts and circumstances of the case the Learned ATIR has erred in law and facts to vacate/annul the Assessment Order?

ii. Whether in the facts and circumstances of the case, the Learned ATIR has erred in law by failing to exercise its powers under s.132 of the 2001 Ordinance, in contravention of the immutable principle of law that defective assumption/exercise of jurisdiction by an authority is incurable?

iii. Whether in the facts and circumstances of the case, the learned ATIR erred in law in holding the selection and conduct of audit proceedings for Tax Year 2018 as void ab initio on the basis of Clause (105A), Part IV of the Second Schedule to the Income Tax Ordinance, 2001, despite the fact that the said Clause was inserted through Finance Act, 2022 and had no retrospective application to prior tax years?

iv. Whether in facts and circumstances of the case, the learned has erred in law and facts by annulling the Order based on the method of computation of income under section 32, 33 and 34 of the Ordinance?

v. Whether in facts and circumstances of the case the learned ATIR has erred in law and facts by applying the "percentage of completion method" under section 36 of the Ordinance to the Taxpayer, who is admittedly a land developer?

vi. Whether, in the facts and circumstances of the case, the learned ATIR erred in law by deleting the addition made on account of the

disallowance of expenses, based on misreading and non-reading of evidence?

vii. Whether, in the facts and circumstances of the case, the learned ATIR erred in accepting evidence at the appellate stage that was not provided before the lower forum, in violation of the judgment of the Honorable Lahore High Court in ITR No. 72381/2020 and STR No.

3.Learned counsel for the petitioner, at the very outset, assailed the impugned order passed by the learned Appellate Tribunal Inland Revenue, contending that the Tribunal fell into patent error in accepting the appeal of the respondent and setting aside the assessment order dated 28.06.2024. He argued that the findings of the Tribunal declaring the audit proceedings void on the basis of alleged violation of the principle of audi alteram partem and Article 10-A of the Constitution, as well as on the ground of immunity under Clause 105-A of Part IV of the Second Schedule to the Ordinance, are wholly misconceived, contrary to law and the facts on record. It was contended that sufficient opportunities of hearing were afforded to the respondent throughout the audit proceedings and the provisions of law were strictly adhered to; therefore, the Tribunal erred in holding that the proceedings suffered from any jurisdictional or procedural defect. Learned counsel further submitted that the respondent had filed its return of income for the Tax Year 2018, which was deemed to be an assessment under section 120 of the Ordinance, and the case was validly selected for audit under section 177. During the course of audit, the respondent raised a claim of immunity under Clause 105-A, which, according to the learned counsel, was not tenable in law. He argued that after issuance of the audit report under section 177(6) and due consideration of the material available on record, the assessing officer, being dissatisfied with the explanations and supporting documents furnished by the respondent, lawfully amended the assessment under section 122(1) read with section 122(5) of the Ordinance. In doing so, certain additions were made to the taxable income, including, inter alia, unearned revenue, which was rightly computed under sections 32 and 34 instead of section 36 as claimed by the respondent. It was further contended that certain business expenses were rightly disallowed under section 174(2) of the Ordinance due to lack of proper documentary evidence and failure to

meet the statutory requirements. He therefore prayed that the impugned order of the Tribunal be set aside and that of the assessing officer be restored.

4.Conversely, learned counsel for the respondent supported the impugned order passed by the learned Appellate Tribunal Inland Revenue and contended that the same is well-reasoned, lawful and does not call for any interference by this Court in exercise of its reference jurisdiction. He argued that the Tribunal rightly appreciated both the factual matrix and the legal position while annulling the assessment order dated 28.06.2024. It was contended that the entire audit proceedings conducted under section 177 of the Income Tax Ordinance, 2001 were without lawful authority in view of the express immunity available to the respondent under Clause 105-A of Part IV of the Second Schedule to the Ordinance, and as such, any proceedings initiated pursuant thereto were void ab initio. Learned counsel further submitted that the show cause notice was issued and the matter was finalised in undue haste, without provision of suitable time or proper consideration of the detailed replies and documentary evidence furnished by the respondent, which vitiates the entire proceedings. On merits, learned counsel contended that the respondent, being engaged in the business of land development, had rightly adopted the method of accounting in terms of section 36 of the Ordinance, i.e., the percentage of completion method, for recognition of revenue, and the assessing officer fell into grave error by computing the income under sections 32, 33 and 34 of the Ordinance. He maintained that the treatment of unearned revenue by the respondent was in accordance with law and accepted accounting principles, and the contrary view taken by the assessing officer is legally unsustainable. It was further argued that the disallowance of business expenses under section 174(2) of the Ordinance was also unjustified, as the respondent had duly furnished supporting documents, which were neither properly examined nor rebutted by the Department. Learned counsel concluded by submitting that the findings recorded by the Tribunal, both on the jurisdictional aspect as well as on merits, are based on correct appreciation of law and facts, and thus, the

instant reference, being devoid of merit, is liable to be answered against the petitioner.

5.We have heard the arguments advanced by the learned counsel for the parties and have also carefully examined the record with their able assistance.

6.This Court is fully conscious of the limitations attached to its jurisdiction while exercising powers under section 133 of the Income Tax Ordinance, 2001. For reference, section 133 is reproduced hereunder:

“133. Reference to High Court. — (1) [Subject to section 126A, within] thirty days of the communication of the order of the Appellate Tribunal or, as the case may be, the Commissioner (Appeals), the aggrieved person or the Commissioner may file a reference, in the prescribed form along with a statement of the case, before the High Court, stating any question of law or a mixed question of law and facts arising out of such order:

Provided that the applicant shall also file the complete record of the Appellate Tribunal [or, as the case may be, the Commissioner (Appeals)] within fifteen days of preferring an application under this section.

[Explanation. – For the removal of doubt it is clarified that a reference against an order of the Commissioner (Appeals), communicated after the date of commencement of the Tax Laws (Amendment) Act, 2024 (V of 2024), shall lie before the High Court notwithstanding proceedings pending prior to the date of commencement of the said Act.]

(2)The statement to the High Court referred to in sub-section (1) shall set out the facts, the determination of the Appellate Tribunal [or, as the case may be, the Commissioner (Appeals)] and the question of law or a mixed question of law and facts which arises out of its order.

(3)Where, on an application made under sub-section (1), the High Court is satisfied that a question of law or a mixed question of law and facts arises out of such order referred to in sub-section (1), it may proceed to hear the case.

(4)A reference to the High Court under this section shall be heard by a Special Bench, or Special Benches as the case may be, to be constituted by the Chief Justice as deemed necessary for hearing cases under this section, comprising not less than two judges of the High Court, and in respect of the reference, the provisions of section 98 of the Code of Civil Procedure, 1908 (Act V of 1908), shall apply so far as may be, notwithstanding anything contained in any other law for the time being in force.

(5)The Special Bench shall decide a reference within six months from the date of its filing.

(6)The High Court shall establish a case management system to ensure that a sufficient number of Special Benches are constituted so as to ensure that a reference filed under this section is decided within the stipulated six months.

(7)The High Court upon hearing a reference under this section shall decide the question of law or a mixed question of law and facts raised by the reference and pass judgment thereon specifying the grounds on which such judgment is based, and the Appellate Tribunal’s order [or, as the case may be, the Commissioner (Appeals)’s order] shall stand modified accordingly.

(8)The High Court shall send a copy of the judgment under the seal of the High Court to the Appellate Tribunal or, as the case may be, the Commissioner (Appeals).

(9)Notwithstanding that a reference has been made to the High Court, the tax shall be payable in accordance with the order of the Appellate Tribunal or, as the case may be, the Commissioner (Appeals): Provided that the tax recovery shall not be made by the Commissioner for thirty days from the date of communication of the order of the Appellate Tribunal or, as the case may be, the Commissioner (Appeals):

Provided further that, if the amount of tax is reduced as a result of the judgment in the reference by the High Court and some amount of tax is found to be refundable, the High Court may, on application by the Commissioner within thirty days of the receipt of the judgment of the High Court that he wants to prefer a petition for leave to appeal to the Supreme Court, make an order authorising the Commissioner to postpone the refund until the disposal of the appeal by the Supreme Court.

(10)On an application filed in a particular reference and after affording an opportunity of being heard to the Commissioner, the High Court may stay recovery of tax, subject to deposit with the assessing authority of not less than thirty per cent of the tax determined by the Appellate Tribunal [or, as the case may be, the Commissioner (Appeals)]. Where recovery of tax has been stayed by the High Court by an order, such order shall cease to have effect on the expiration of a period of six months following the day on which it was made, unless the reference is decided or such order is withdrawn by the High Court earlier.

(11)Section 5 of the Limitation Act, 1908 (IX of 1908), shall apply to an application made to the High Court under sub-section (1).

(12)An application under sub-section (1) [by the aggrieved person other than the Commissioner] shall be accompanied by a fee of fifty thousand rupees.

(13)No application filed by the Commissioner under sub-section (1) shall be entertained unless it is accompanied by a written authorisation by the relevant Chief Commissioner.]”

7.A plain reading of section 133 of the Income Tax Ordinance, 2001 makes it abundantly clear that the jurisdiction conferred upon the High Court in a reference is special, limited and circumscribed by the express language of the statute itself. The Income Tax Ordinance, 2001 being a special law, the jurisdiction exercised thereunder must remain confined within the four corners of the statutory framework provided by the legislature. Under section 133 of the Ordinance, the role of the High Court is restricted to examining and answering the questions of law, or mixed questions of law and facts, arising out of the order passed by the learned Appellate Tribunal Inland Revenue or the Commissioner (Appeals), as the case may be. The Court is, therefore, bound to answer the questions framed in the reference either in the affirmative or in the negative on the basis of the material available on record and the legal propositions involved. The request made by the learned counsel for the parties regarding fresh re-calculation and determination of tax liability essentially pertains to factual examination and procedural scrutiny of accounts, audit workings and assessment record, which necessarily require appreciation of evidence, verification of supporting documents and factual determination. Such functions squarely fall within the exclusive statutory domain of the assessing and adjudicatory authorities constituted under the Ordinance and cannot be undertaken by this Court while exercising reference jurisdiction under section 133 of the Ordinance. The High Court, in exercise of such jurisdiction, is neither vested with original assessment powers nor authorised to undertake re-computation of tax liability. To assume such jurisdiction would amount to overstepping

the statutory mandate prescribed by section 133, which is impermissible in law. Furthermore, this Court is not strictly bound by the concessions, proposals or requests advanced by learned counsel for the parties where the same travel beyond the statutory limits prescribed by law. Having clarified the scope and extent of the jurisdiction exercisable by this Court under section 133 of the Income Tax Ordinance, 2001, we now proceed to examine the instant reference in light of the questions of law framed for determination.

8.It would be advantageous to examine the sequence of events as they unfolded during the course of proceedings. In this regard, paragraph 18 of the impugned order contains a tabulated account depicting the chronology of correspondence, including notices, reminders and replies issued by and to the respondent during the audit and assessment proceedings, which is reproduced hereunder for ready reference:

Sr. Notice / Correspondence Date 1 Notice of selection u/s 177 27.11.2020 2 IDR u/s 177(1) 30.11.2020 3 Reminder 09.09.2022 4 Reply of the taxpayer 15.09.2022 5 Rebuttal of reply / request for record u/s 29.12.2023 6 Reminder 22.01.2024 7 Adjournment request 29.01.2024 8 Reply by the taxpayer 23.04.2024 9 Final IDR 21.05.2024 10 Audit Report u/s 177(6) 31.05.2024 11 Reply by the taxpayer 05.06.2024 12 Show Cause Notice u/s 122(9) 14.06.2024 13 Adjournment request 21.06.2024

9.Before adverting further, it would be advantageous to reproduce the relevant provisions of section 177 of the Ordinance, which govern the statutory timeframe for issuance of an IDR:

“177. The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person, and where such record or documents have been kept in electronic form, the person shall allow access to the Commissioner or the officer authorised by the Commissioner to use the machine and software on which such data is kept, and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that (a) the Commissioner may, after recording reasons in writing, call for record or documents including books of accounts of the taxpayer; and

(b)the reasons shall be communicated to the taxpayer while calling for record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after the expiry of six years from the end of the tax year to which they relate.”

177(9) Any person employed by a firm referred to in sub-section (8) may be authorised by the Commissioner, in writing, to exercise the powers under sections 175 and 176 for the purposes of conducting an audit under that sub-section.”

10.The proviso to section 177 of the Ordinance clearly stipulates that the Commissioner shall not call for record or documents of a taxpayer after the expiry of six years from the end of the relevant tax year. While the impugned proceedings may, in a strictly technical sense, fall within the outer limit prescribed by law, the manner in which such jurisdiction has been exercised warrants close judicial scrutiny. Admittedly, the respondent filed its return for the Tax Year 2018 (01.07.2017 to 30.06.2018) on 09.01.2019, which attained the status of a deemed assessment under section 120 of the Ordinance. The case was selected for audit under section 177 vide intimation dated 27.11.2020, i.e., after 470 days. Thereafter, a conspicuous period of inactivity ensued, as the subsequent reminder was not issued until 09.09.2022, i.e., after a further delay of 651 days. The respondent promptly responded within a week; however, the Department remained dormant for an additional period exceeding one year and two months, issuing a rebuttal only on 29.12.2023. What is of particular significance is the abrupt shift in the Department’s approach thereafter. From December 2023 onwards, the proceedings were pursued with unusual expedition, culminating in a series

of approximately nine correspondences within a short span of six months, ultimately leading to the issuance of a show cause notice under section 122(9) of the Ordinance on 14.06.2024, requiring compliance within merely ten days. This stands in stark contrast to the preceding period of more than five years, during which only sporadic steps were taken.

11.The pattern of conduct underwent a drastic shift thereafter. The final IDR was issued on 21.05.2024, followed by the audit report on 31.05.2024, at a stage when the matter was fast approaching limitation. Subsequently, a show cause notice under section 122(9) of the Ordinance was issued on 14.06.2024, requiring compliance by 24.06.2024. A closer examination of these dates reveals that 14.06.2024 fell on a Friday, followed by the weekend on 15–16 June 2024, and thereafter public holidays on account of Eid-ul-Azha from 17 to 19 June 2024, as notified vide Cabinet Division Circular dated 11.06.2024, with another weekend on 22–23 June 2024. In effect, the respondent was left with only three effective working days to respond to a detailed and voluminous show cause notice, at a stage when only about sixteen days remained before the proceedings were to become time-barred. This chronological unfolding of events demonstrates that while the Department remained largely dormant for more than five years, it sought to compress the entire decisive phase of proceedings into a handful of days at the fag end of the limitation period. Such an approach, in our considered view, is not merely a procedural irregularity but strikes at the very root of fairness. The law, as consistently held in both national and international jurisprudence, does not merely require action within limitation but mandates that such action be undertaken in a manner that is reasonable, diligent and fair. The right to a fair trial under Article 10-A of the Constitution extends to all proceedings having civil consequences and necessarily includes the right to a meaningful opportunity of hearing.

12.The issuance of a show cause notice is not an empty formality; it must afford sufficient time and a real opportunity to enable the affected party to effectively defend its position. In the present case, the truncated timeframe, coupled with intervening holidays, rendered the opportunity illusory rather

than real. The principle of audi alteram partem cannot be reduced to a ritualistic compliance, nor can it be sacrificed at the altar of administrative convenience or the pressure of limitation. The conduct of the Department, marked by prolonged inaction followed by undue haste, thus falls short of the constitutional and legal standards of due process, thereby vitiating the proceedings.

13.The principle of audi alteram partem, which is deeply embedded in our constitutional and legal framework, cannot be reduced to a mere formality; rather, it requires that the opportunity afforded must be real, reasonable and meaningful in the facts and circumstances of each case. The Hon’ble Supreme Court of Pakistan, in the judgment reported as 2023 SCMR 603, observed that the denial of a fair and meaningful opportunity of defence, including the right to contest evidence, violates Article 10-A of the Constitution and the principles of natural justice, which mandate that all adjudicatory actions be conducted fairly, impartially and with due opportunity of hearing before any adverse decision is taken. The Hon’ble Court further held that:

“Not providing an ample opportunity of defence and depriving the accused officer of the right of cross-examination of the departmental representative who led evidence and produced documents against the accused is also contrary to Article 10-A of the Constitution, in which the right to a fair trial is a fundamental right. What is more, the principles of natural justice require that the delinquent should be afforded a fair opportunity to give explanation and contest the evidence before he is found guilty and condemned. The doctrine of natural justice is destined to safeguard individuals, and whenever civil rights, human rights, constitutional rights and other guaranteed rights under any law are found to be at stake, it is the duty of the Court to act promptly to shield and protect such fundamental rights of every citizen. The principle of natural justice and fair-mindedness is grounded in the philosophy of affording a right of audience before any detrimental action is taken, in tandem with its ensuing constituent that the foundation of any adjudication or order of a quasi-judicial authority, statutory body or any departmental authority regulated under some law must be rational and impartial, and the decision-maker must have an adequate degree of decision-making independence, and the reasons for the decision arrived at should be well- defined, just and understandable. It is, therefore, incumbent upon all judicial, quasi-judicial and administrative authorities to carry out their powers with a judicious and even-handed approach so as to ensure justice in accordance with the tenor of the law and without any violation of the principles of natural justice. (Ref: Sohail Ahmad v. Government of Pakistan through Secretary of Interior Ministry, Islamabad and others (2022 SCMR 1387) and Inspector General of Police, Quetta and another v. Fida Muhammad and others (2022 SCMR 1583).)”

14.This jurisprudence is equally well-entrenched in international legal frameworks; where the principle of audi alteram partem, as a fundamental facet of natural justice, mandates that no adverse action be taken without affording a real, reasonable and effective opportunity of hearing, save in exceptional circumstances dictated by compelling necessity. The Supreme Court of India in 2008 INSC 484 observed that:

“Rules of natural justice are not embodied rules. Being means to an end and not an end in themselves, it is not possible to make an exhaustive catalogue of such rules. But there are two fundamental maxims of natural justice, viz. (i) audi alteram partem and (ii) nemo judex in re sua. The audi alteram partem rule has many facets, two of them being (a) notice of the case to be met; and (b) opportunity to explain. This rule cannot be sacrificed at the altar of administrative convenience or celerity. The general principle—as distinguished from an absolute rule of uniform application—seems to be that where a statute does not, in terms, exclude this rule of prior hearing but contemplates a post- decisional hearing amounting to a full review of the original order on merits, then such a statute would be construed as excluding the audi alteram partem rule at the pre-decisional stage. Conversely, if the statute conferring the power is silent with regard to the giving of a pre- decisional hearing to the person affected and the administrative decision taken by the authority involves civil consequences of a grave nature, and no full review or appeal on merits against that decision is provided, courts will be extremely reluctant to construe such a statute as excluding the duty of affording even a minimal hearing, shorn of all its formal trappings and dilatory features at the pre-decisional stage, unless, viewed pragmatically, it would paralyse the administrative process or frustrate the need for utmost promptitude. In short, this rule of fair play must not be jettisoned save in very exceptional circumstances where compulsive necessity so demands. The court must make every effort to salvage this cardinal rule to the maximum extent possible, with situational modifications. But the core of it must, however, remain, namely, that the person affected must have a reasonable opportunity of being heard and the hearing must be a genuine hearing and not an empty public relations exercise.”

15.When the aforesaid principles laid down in both national and international jurisprudence are examined in the context of the present case, the sequence of events speaks for itself and reflects a clear departure from the mandate of fair trial and due process as guaranteed under Article 10-A of the Constitution of the Islamic Republic of Pakistan, 1973.

16.Another aspect which merits consideration is whether the timeframe of ten days provided by the Department to the respondent for

compliance with the show cause notice finds any statutory backing under the Income Tax Ordinance, 2001 or under any administrative instructions governing the field. For ease of reference, section 122(9) of the Ordinance is reproduced hereunder:

“122(9): No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard.

Provided that an order under this section shall be made within one year of the issuance of a show cause notice or within such extended period as the Commissioner may, for reasons to be recorded in writing, allow; so however, such extended period shall in no case exceed ninety days. This proviso shall be applicable to a show cause notice issued on or after the first day of July, 2021.”

17.A plain reading of section 122(9) of the Ordinance makes it abundantly clear that while it mandates affording the taxpayer an opportunity of being heard before amendment of assessment, it does not prescribe any rigid or minimum timeframe within which such response must be furnished. Rather, the legislative emphasis is on the quality and effectiveness of the opportunity, not on its mechanical curtailment. Significantly, the proviso to section 122(9) provides a period of one year for passing an order after issuance of a show cause notice (extendable by a further ninety days), thereby indicating that the legislature has consciously allowed a reasonable window to ensure proper adjudication after due consideration of the taxpayer’s response.

18.In juxtaposition, the conduct of the Department in restricting the respondent to a mere ten days, effectively reduced to three working days on account of intervening holidays, appears to be wholly disproportionate and unsupported by any statutory mandate. This position is further reinforced upon examination of the administrative framework embodied in CBR Circular No. 7(2) dated 24.01.1994, which, though not statutory in nature, provides valuable guidance regarding fair procedure in assessment proceedings.

The said circular reads as follows: -

“C. No. 7 (2) Dt. 14/94

GOVERNMENT OF PAKISTAN

CENTRAL BOARD OF REVENUE

Dated 24th January, 1994

From, Secretary To, The Regional Commissioner of Income-tax, Northern Region, Islamabad.

The Regional Commissioner of Income-tax, Central Region, Lahore.

The Regional Commissioner of Income-tax, Southern Region, Karachi.

Subject: COMPLETION OF ASSESSMENT

PROCEEDINGS IN THREE HEARINGS – INSTRUCTIONS

REGARDING

I am directed to say that it is generally alleged that inordinate delays occur in finalization of assessment proceedings which creates harassment amongst the taxpayers. The matter has been considered in the Board. The following instructions are being issued for strict compliance in the field:

a) The first notice under section 61 of the Income Tax Ordinance, 1979 or Section 16(4) of the Wealth Tax Act, 1963 may always be issued after scrutiny of the return and the notice may specifically indicate the details, documents and books of accounts which the assessing officer wishes to examine while processing the case. The general practice of calling of information piecemeal and calling for “all books of accounts and details” in a stereotyped manner may be discontinued.

b) Adjournments allowed or made in the proceedings may be recorded in writing and there may be no occasion to allow oral adjournments.

c) Once the documentation and examination of books of accounts is complete, discrepancies, if any, and the proposed additions may be confronted to the assessee, in writing, through a formal notice under section 62 and the assessment proceedings be finalized in accordance with law. Under all circumstances such proceedings may be completed within 3 (three) hearing and not more.

2.The Inspecting Officers will report by their notes as to whether these instructions were followed by the assessing officers.

Any violation of these instructions will be viewed seriously. These instructions may be circulated amongst all the officers and the Tax Bar Associations.

19.The said circular explicitly discourages piecemeal requisitions of information and emphasizes structured proceedings, culminating in the principle that assessments should ordinarily be completed within three hearings, ensuring that discrepancies and proposed additions are confronted to the taxpayer in a manner that enables an effective response. The underlying rationale of the circular is not to curtail the taxpayer’s right of defence but to streamline proceedings while preserving fairness and procedural balance. Even within this framework, the concept of “three hearings” inherently presupposes that each hearing must afford a meaningful and adequate opportunity to the taxpayer to respond, clarify and contest the issues raised. It cannot, by any interpretative stretch, be read as sanctioning an abridged or illusory opportunity compressed into a few days, particularly in cases involving complex financial and legal issues. In the judgment reported as 2024 PLD 545, the Lahore High Court observed that a show cause notice is a fundamental safeguard of due process and natural justice, requiring that a person be informed of specific allegations and afforded adequate time and opportunity to respond, thereby ensuring a fair hearing, reasoned decision-making and protection of rights under Articles 4 and 10-A of the Constitution. The Court further observed that:

“12. The issuance of a show cause notice is crucial in safeguarding these rights, as it gives individuals and organizations the chance to justify their actions and respond to allegations of law violation or non- compliance before any adverse action is taken against them. Therefore, if a specific allegation is not presented to the recipient, denying them the opportunity to respond, any judgment on that allegation would violate the right to due process and a fair trial, contravening Articles 4 and 10- A of the Constitution.

13.A show cause notice is an official document issued by an authority to inform a recipient of a potential violation or non-compliance with a law, providing them an opportunity to respond. It upholds the principle of natural justice, ensuring a fair hearing before any decision affecting their rights or interests is made. The recipient is given adequate time to respond, access to relevant evidence, and an opportunity to be heard. This process ensures unbiased decision-making based on facts and

relevant laws, protecting the recipient’s rights and interests. The principles of impartiality and reasons are also upheld, requiring the decision-maker to be unbiased and to provide reasons for the decision. Thus, a show cause notice is a crucial tool for law enforcement, ensuring a fair and transparent process before any adverse order is passed. Reliance is placed on Siemens Engineering v. Union of India (AIR 1976 SC 1785) and S.N. Mukherjee v. Union of India (AIR 1990

SC 1984).”

20.A broader legal principle that emerges from the foregoing is that where a fiscal statute requires prior notice before recovery of tax, duty, surcharge or any public dues, such notice must not be construed as a ceremonial or empty procedural step. The requirement of notice necessarily imports an obligation to afford the taxpayer a real, effective and meaningful opportunity to arrange payment, seek clarification, avail lawful remedies, raise legitimate objections or comply voluntarily within a reasonable period. The law does not favour surprise recoveries, instantaneous attachment or coercive action that renders the statutory notice nugatory in substance while preserving it only in form. In matters of taxation, the State undoubtedly possesses lawful authority to assess, demand and recover public revenue; however, such authority must be exercised in a manner consistent with fairness, proportionality and constitutional discipline. Revenue powers, though essential to governance, are not exempt from the standards of reasonableness that govern all public action. Therefore, whenever legislation requires that a date be specified for payment, or contemplates prior intimation before recovery, it necessarily signifies that the taxpayer must be given sufficient and workable time to respond. The determination of what constitutes sufficient time may depend upon the nature of the demand, the amount involved, the complexity of accounts, geographical circumstances, intervening holidays, banking realities and the availability of statutory remedies. A meaningful period of time in fiscal recovery matters serves several legitimate purposes: it enables voluntary compliance, which remains the preferred mode of tax administration in any orderly system; it reduces unnecessary litigation by allowing taxpayers to reconcile accounts or satisfy liabilities without coercive proceedings; it preserves confidence in revenue institutions by demonstrating that the State acts firmly yet fairly; and it

protects businesses and individuals from abrupt disruption of commercial operations, banking arrangements, contractual obligations and day-to-day economic activity. A recovery mechanism that disregards these considerations may secure short-term collection but at the cost of long-term institutional trust and economic stability. The Hon’ble Supreme Court of Pakistan has examined this very aspect in the judgment reported as 2026 SCMR 227, titled Commissioner Inland Revenue v. M/s Pakistan LNG Limited Islamabad, wherein the august Court observed as under:

“7. We are of the opinion that the clear and unambiguous reading of section 140 of the Ordinance is that the Commissioner shall issue notice in writing to pay the amount stated in the notice by the date set out in the notice. The language of section 140 of the Ordinance does not envisage immediate or mechanical recovery; rather, the provision contemplates that the Commissioner will issue notice and will give a reasonable timeframe for the purpose of recovery. The question of what is reasonable has been considered by the impugned judgment by way of the suggestion that possibly a seven-day notice can be considered reasonable; however, we are of the opinion that the reasonableness of the timeframe given can be considered on a case-to-case basis depending on the circumstances and the facts of the case, given that although the legislative intent is to provide for a date, it has not stipulated a statutory notice period before which recovery can be effected. This requirement of setting a date for payment of the tax due places the burden on the Commissioner for substantive compliance and is not a procedural formality. We find that a notice that seeks recovery on the same date as its issuance would defeat the very objective of setting out a date and would render the legal safeguard meaningless. Yet another aspect of significance is the constitutional underpinning of section 140 of the Ordinance. The requirement of notice before recovery is not merely statutory but reflects the broader guarantees of due process and fair trial under Article 10-A of the Constitution, as well as the right to dignity under Article 14. Courts have consistently upheld that even in fiscal matters, recovery must be carried out in a manner that respects the individual’s dignity and legal safeguards. Consequently, even where the law allows coercive recovery, it must be carried out in a way that preserves the dignity of the taxpayer.

8.The facts in these cases show that within a short span of time from the decision by the CIR (Appeals), notice for immediate recovery was sought by the petitioners. In the case of the respondent in CPLA No. 3578 of 2024, the learned Single Judge, in his judgment dated 07.09.2022, observed that while the appellate order passed by the Commissioner was uploaded on the FBR’s web portal at 3:28 p.m. on 09.03.2022, the Commissioner issued a notice under section 140 of the Ordinance to the banks at 4:00 p.m. on the same day, and the accounts of the respondent were attached and the amount in dispute was recovered instantly within a span of half an hour. Similarly, in the case of the respondent in CPLA No. 4598, the learned Single Judge, in his judgment dated 14.12.2023, noted that while the appeal of the respondent before the CIR (Appeals) was decided on 11.05.2023 at 1:56

p.m., the Commissioner issued a notice under section 140 of the Ordinance to the banks on the very same day at 10:30 p.m. and sought recovery of the amount in dispute. In both instances, there was no meaningful interval between the appellate decision and the initiation of coercive recovery, thereby depriving the party from whom the money was to be recovered of adequate notice. Hence, the Commissioner’s conduct in both instances effectively nullified the very purpose of serving notice, which the statute holds as a precondition to coercive action in terms of section 140 of the Ordinance.

9.The conduct of the Commissioner in the present case, therefore, falls short of the statutory requirement of section 140 of the Ordinance. Tax recovery is not meant to be a ‘grab and go’ process. Even coercive recovery measures must follow a proper and fair procedure. Tax authorities should not act as penalising agencies, but as institutions of the State tasked with facilitating compliance through clarity, transparency and procedural propriety. The legitimacy of a tax system depends, in large measure, on whether taxpayers are able to understand not only that they are liable, but also the consequences for not discharging their liability. The rule of law demands that compliance be made and enforcement be exercised within a framework that guarantees legal certainty, which is a cornerstone of any legitimate tax regime. Legal certainty requires not just that taxpayers know they owe tax, but that they are clearly informed of when, how and on what basis recovery will be pursued. Section 140 gives effect to this requirement by obligating the Commissioner to set out a date for payment, an act that marks the beginning of a legal timeline and protects the taxpayer from arbitrary or immediate enforcement. The statutory framework governing taxation is premised on fairness, notice and the right to reasonable notice. We reiterate that coercive recovery is bound by law and rules and must work within this framework. By bypassing the statutory requirement to set a payment date, the Commissioner’s action undermines the very structure and intent of section 140 of the Ordinance and the principle of legal certainty embedded within the scheme of law.”

21.It is equally well-settled that fairness in fiscal administration is not inconsistent with efficiency. Expediency cannot be invoked to defeat safeguards deliberately built into the statute. If immediate recovery were always intended, the legislature would not require notice, specification of date or prior intimation. Where the statute has chosen to incorporate such safeguards, courts are bound to give them substantive meaning. Thus, a notice granting only illusory time, or demanding compliance under circumstances where compliance is practically impossible, would fail the test of fairness and would amount to colourable rather than genuine compliance with law. The constitutional dimension of the matter is equally significant. Fiscal proceedings often entail serious civil consequences, including freezing of accounts, attachment of assets, reputational injury and disruption of lawful business. For that reason, the guarantee of due process

under Article 10-A and the protection of dignity under Article 14 extend even to tax recovery measures. The taxpayer, though liable to lawful taxation, does not forfeit constitutional protection merely because the dispute arises in the revenue sphere. Coercive powers must therefore be exercised with restraint, transparency and procedural fairness. This Court accordingly holds that where tax recovery is preceded by statutory notice, the notice must provide a reasonable and meaningful opportunity for compliance; any recovery undertaken in undue haste, without practical time to respond, or in a manner that nullifies the purpose of notice, is contrary to the spirit of the statute and inconsistent with the constitutional norms of fairness, reasonableness and dignity.

22.Having examined the entire record in light of the above legal and factual matrix, it becomes evident that the defect in the present case is not a mere irregularity confined to a particular stage of the proceedings; rather, it goes to the very root of the matter. The foundational requirement of affording a fair, reasonable and meaningful opportunity of hearing, as envisaged under Article 10-A of the Constitution, stands compromised. Once the very initiation and culmination of proceedings are tainted with a denial of due process, the superstructure built thereupon cannot be allowed to survive in the eye of law. It is a well-settled principle of jurisprudence that when the foundation of an action is void, all consequential proceedings arising therefrom automatically fall to the ground. The Hon’ble Supreme Court of Pakistan has consistently held that where an order suffers from inherent lack of jurisdiction or is passed in violation of the principles of natural justice, the same is void ab initio and all subsequent or ancillary actions based thereon are rendered non est. Reference in this regard may be made to Maulana Atta-ur-Rehman v. Al-Hajj Sardar Umer Farooq (PLD 2008 SC 663), wherein it was held that if the initial order is without lawful authority, the entire edifice built upon it collapses. The Hon’ble Supreme Court observed that:

“The petitioner was declared as returned candidate in the unofficial result announced by the Election Commission, which is established from the applications filed by respondents Nos. 2 and 3 before the

Returning Officer and the order of re-checking/recount passed thereon. On perusal of record, we find that Forms XIV prepared by the respective Presiding Officers on the basis of the counting of votes are in order and no one has raised any objection thereto. Further, Form XVI (consolidation statement of the count of the result) based on Forms XIV prepared by Presiding Officers was duly signed by the Returning Officer on 20.02.2008. Clearly, after having signed the above form, the learned Returning Officer had become functus officio and the withholding of the consolidated statement of result by him was not justified on any ground. The proceedings carried out subsequently were coram non judice and void ab initio. In support of the above proposition, reference is made to Ghani-ur-Rehman v. Pir Haider Ali Shah (1997 CLC 1092), wherein it was held that the order of recount of votes of the entire constituency passed by the Election Commission after Gazette notification of the successful candidate was void ab initio, without lawful authority and of no legal effect, and was accordingly set aside. In Ch. Perwaiz Akhtar v. District Returning Officer (PLD 2006 Lahore 29), it was held that the Returning Officer, after consolidating the result for its onward transmission, becomes functus officio. In Emmanuel Masih v. The Punjab Local Councils Election Authority and others (1985 SCMR 729), it was held that the Election Authority is given extensive power to ensure impartiality, honesty and fairness while elections are being conducted, but it becomes functus officio after the elections are over and the validity of the elections can be challenged by an aggrieved person only through an election petition. In the same vein are the cases reported as Rehmatullah and others v. Saleh Khan and others (2007 SCMR 729), Punjab Workers’ Welfare Board Government of Punjab and Human Resources Department, Lahore v. Mehr Din (2007 SCMR 13), Muhammad Tariq Khan v. Khawaja Muhammad Jawad Asami (2007 SCMR 818) and All Pakistan Newspapers Society v. Federation of Pakistan and others (PLD 2004 SC 600). It is well settled that when the basic order is without lawful authority and void ab initio, the entire superstructure raised thereon falls to the ground automatically, as held in Yousaf Ali v. Muhammad Aslam Zia (PLD 1958 SC 104).”

23.The principle has also been recognised in Muhammad Hanif Abbasi v. Jahangir Khan Tareen (PLD 2018 SC 114), wherein the Hon’ble Supreme Court observed as under:

“6. Coming to the question about the vires of sections 15-A and 15-B of the Ordinance, 1969 as introduced by the Finance Act, 1995, and the argument of the learned counsel for the respondent that, being violative of the provisions of Article 70(2) of the Constitution, the said sections are void ab initio and non-est, it may be noted that the respondent has never challenged the said provisions through any independent proceedings at any stage. No challenge was made when the SECP issued the letter to the respondent; instead he promptly made the payment as demanded by the SECP. Even in the first concise statement filed by the respondent in these proceedings there was no challenge to the sections. It was only in the second concise statement that the vires of the law were challenged, and at the time of oral submissions, the same was reiterated. We are conscious of the principle that there is no estoppel against law and that a point of law can be allowed to be raised at any stage of the

proceedings, and that no valid structure can be built upon a foundation of law which is void ab initio. No rights and liabilities can be created on the basis of such law.”

24.It is a settled principle of law that where an order is made in excess of jurisdiction, it is void and non-existent in the eye of law, and any subsequent orders or rights founded upon such a void order likewise collapse and have no legal effect, notwithstanding any purported finality attached to the original order. In Yousaf Ali v. Muhammad Aslam Zia and 2 others (PLD 1958 SC 104), the Hon’ble Supreme Court held as under:

“Where the Legislature clothes an order with finality, it always assumes that the order which it declares to be final is within the powers of the authority making it, and no party can plead as final an order made in excess of the powers of the authority making it; in the eye of law such order is void and non-existent. And if on the basis of a void order subsequent orders have been passed either by the same authority or by other authorities, the whole series of such orders, together with the superstructure of rights and obligations built upon them, must, unless some statute or principle of law recognising as legal the changed position of the parties is in operation, fall to the ground, because such orders have as little legal foundation as the void order on which they are founded. On this view the orders made by the Rehabilitation Board and the Central Government refusing to eject the respondents, which were based on that part of the Deputy Custodian’s order which we have held to be in excess of his jurisdiction, were void and not final within the meaning of section 13-B of the Rehabilitation Ordinance, and it was the Rehabilitation Commissioner’s order directing ejectment of the respondents that became final in law.”

25.Likewise, in Izhar Alam Farooqi v. Sh. Abdul Sattar Lasi (2008 SCMR 240), the Hon’ble Supreme Court held as under:

“There can be no exception to the principle that an order passed or an act done by a Court or a tribunal not competent to entertain the proceedings is without jurisdiction, and that it is mandatory for the Court or tribunal, as the case may be, to attend to the question of jurisdiction at the commencement of the proceedings, because the jurisdictional defect is not removed by mere conclusion of trial or inquiry, and an objection to jurisdiction can be raised at any subsequent stage. This Court in Rashid Ahmed v. State (PLD 1972 SC 271) held as under:

‘If a mandatory condition for the exercise of a jurisdiction before a Court, tribunal or authority is not fulfilled, then the entire proceedings which follow become illegal and suffer from want of jurisdiction. Any orders passed in continuation of these proceedings in appeal or revision equally suffer from illegality and are without jurisdiction.’”

26.In view of the authoritative pronouncements of national and international jurisprudence reproduced above, and the settled proposition of law that where the foundational action is vitiated by lack of jurisdiction or violation of due process, all subsequent and consequential proceedings, regardless of their form or apparent legality, are rendered void ab initio, it is clear that the defect in the present case is not curable, procedural or merely technical in nature, but strikes at the very jurisdictional foundation of the proceedings. Such proceedings cannot be salvaged on the basis of subsequent compliance, nor can they derive legitimacy from the mere fact that they were undertaken within the prescribed limitation period. The law does not countenance a situation where the substance of justice is sacrificed in favour of procedural expediency. The denial of a fair, reasonable and meaningful opportunity of hearing, as guaranteed under Article 10-A of the Constitution and embodied in the principle of audi alteram partem, renders the entire exercise undertaken by the Department legally unsustainable.

27.Another important aspect of the controversy requiring consideration relates to the applicability of Section 36 of the Income Tax Ordinance, 2001, to the business activities of the respondent, which is admittedly engaged in land development. The Department has questioned the method adopted for recognition of income, particularly the percentage of completion method, on the premise that the respondent's income ought to have been computed under Sections 32, 33 and 34 of the Ordinance. In support of this contention, reliance has been placed upon the judgment in Emaar DHA Islamabad Limited v. Commissioner Inland Revenue (ITR No.34 of 2013), particularly paragraphs 13 and 20 thereof, as well as the judgment rendered by this Court in M/s Bahria Town, ITR Nos.92 and 93 of 2024. The controversy, therefore, raises an important question concerning the relationship between the general statutory provisions governing computation and recognition of business income and the specific mechanism prescribed for income attributable to long-term contracts. Its determination necessarily requires an examination of the nature of the respondent's business activities, the contractual obligations undertaken, and the statutory conditions governing

the application of Section 36 of the Ordinance. For the convenience, the relevant extracts from paragraphs 13 and 20 of the aforesaid judgment are reproduced hereunder:

“13. Let us consider the facts of the instant case. The applicant claims that it is a developer and not a construction contractor. And consequently its contracts for sale of developed real estate ought not be treated as long-term contracts within the meaning of section 36(3) of the Ordinance. Let us note here that the definition of a long-term contract does not define the term ‘developer’ or otherwise create any distinction between a contract for construction versus a contract for developed real estate. The Dictionary of Real Estate Terms (Jack P. Friedman, Jack C. Harris, J. Bruce Lindeman 6th Edition) defines ‘developer’ as “one who transforms raw land to improved property by use of labor, capital and entrepreneur efforts.” And ‘development’ is defined as “the process of adding improvements on or to a parcel of land. Such improvements may include drainage, utilities, subdividing, access, buildings and any combination of these elements. Also the project where such improvements are being made.” It is obvious that any development project necessarily includes a construction component pursuant to which raw land is developed by the developer. The Income Tax Ordinance did not separately provide for taxation of builders and developers up until section 100D was introduced in the Ordinance by Finance Act, 2020. Section 100D is therefore not applicable for our present purposes as we are dealing with the applicant’s tax affairs for the tax year 2009. Section 100D is, however, relevant to understand the current legislative understanding of a builder and developer as defined under section 100D(9) which defines a builder as someone “engaged in”the construction and disposal of residential or commercial buildings”. And it defines a developer as someone “engaged in the development of land in the form of plots of any kind either for itself or otherwise.” Section 100D(9)(c) also defines ‘capital investment’ to mean “investment as equity resources and does not include borrowed funds.”

20.In the present case it is obvious that there is no preexisting property that is the subject matter of the agreement for sale between the applicant and the purchaser in relation to which installment payments were received by the applicant. The contract for sale affords a purchaser limited finishing options. But it cannot be said that the purchaser does not acquire any right in relation to the property that forms the subject matter of the agreement for sale till such time that the title to the property and underlying land is transferred by the applicant to the purchaser upon completion of construction of the property. The agreement for sale can at best be described as two contracts rolled into one. One for the sale of ownership rights in the underlying land. And the second for sale of property to be constructed by the applicant and delivered to the purchaser within a certain period of time during which the purchaser is obliged to pay consideration in the form of installment payments reflecting the progress being made in the construction of the property by the applicant leading toward the completion of the developed and finished property. The installment payments constitute consideration for construction and sale of property the

completion of which takes longer than a tax year. In such sense the contract for sale essentially includes contract of construction and performance of services by the applicant in relation to such construction, which contract is spread over more than one tax year and consequently falls within the definition of a long-term contract under section 36 of the Ordinance.”

27.It is a well-established principle of statutory interpretation that the provisions of an enactment must be read harmoniously, so as to give effect to the legislative purpose underlying each provision without rendering any part thereof redundant or ineffective. Sections 32, 33 and 34 of the Ordinance provide the general framework governing methods of accounting and recognition of income and expenditure, whereas Section 36 specifically deals with the attribution of income arising from long-term contracts. These provisions form part of the same statutory scheme and must, therefore, be construed in a manner which preserves their respective fields of operation. The existence of general provisions regulating the computation of business income does not necessarily exclude the application of a specific provision enacted to address a particular category of commercial transactions. Equally, the application of such specific provision remains dependent upon satisfaction of the conditions prescribed therein. Consequently, the question whether income arising from a development arrangement is to be recognized by reference to the stage of completion cannot be determined merely by describing the taxpayer as a land developer. The relevant consideration is whether the contractual arrangement possesses the characteristics of a long- term contract within the meaning of Section 36 and whether the corresponding method of income recognition is consistent with the statutory framework. In this context, the judgment in Emaar DHA Islamabad Limited v. Commissioner Inland Revenue assumes considerable significance. The Department has sought to derive support from certain observations contained in paragraphs 13 and 20 of the said judgment. However, the interpretation of a judicial pronouncement necessarily requires consideration of the judgment in its entirety, including the material facts, the questions requiring determination, the statutory provisions examined and the reasoning forming the foundation of the ultimate conclusion. The ratio decidendi of a judgment cannot be ascertained by extracting isolated observations without reference

to the context in which they were expressed. A judicial precedent constitutes authority for the legal principle actually determined therein and cannot be extended mechanically to circumstances which were neither considered nor necessarily contemplated by the Court. This distinction assumes particular importance in fiscal matters, where the incidence and computation of tax are governed by specific statutory provisions and where apparently similar commercial activities may involve materially different contractual obligations and methods of revenue recognition. The legal effect of the judgment in Emaar DHA Islamabad Limited must, therefore, be appreciated by identifying the precise principle governing the treatment of income arising from development arrangements, rather than attributing to it an unrestricted proposition that Section 36 stands excluded merely because the taxpayer carries on the business of land development.

28.A closer examination of the aforesaid judgment reveals that the controversy before the Court revolved around the characterization of development activities and the applicability of Section 36 to contractual arrangements involving the development and subsequent transfer of immovable property. The division sought to be drawn between a developer and a construction contractor was specifically considered in the context of the statutory definition of a long-term contract. The Court observed that Section 36(3) neither defines the expression "developer" nor expressly creates any difference between contracts involving construction and those relating to the development of real estate. This observation is significant because the applicability of a taxing provision must ordinarily be determined by the language employed by the legislature and the substantive character of the transaction, rather than by the commercial designation assigned to the person undertaking the activity. Where the legislature has not expressly incorporated a distinction between two categories of commercial undertakings, such distinction cannot be introduced merely through administrative interpretation unless it necessarily follows from the language, context and purpose of the statutory provision.

29.The judgment supra further examined the commercial meaning of the expressions "developer" and "development" with reference to recognized real estate terminology. The Court observed that development involves the transformation of raw land into improved property through the deployment of labour, capital and entrepreneurial resources. Such transformation ordinarily encompasses a variety of activities, including the provision of infrastructure, drainage systems, utilities, access roads, subdivision of land, construction and other improvements necessary to render the property suitable for its intended use. These observations are material to understanding the nature of real estate development, which cannot invariably be regarded as a simple transaction involving the purchase and subsequent resale of land. Depending upon the contractual arrangement, development may constitute a composite commercial undertaking involving several interdependent stages of performance, each contributing towards the creation of the property ultimately agreed to be delivered. The construction element in such an undertaking may not necessarily be confined to the erection of residential or commercial buildings; it may also extend to infrastructure and ancillary works forming an integral part of the development project.

30.Another noteworthy aspect of the aforesaid judgment is the distinction drawn between the statutory framework applicable during the relevant tax year and the subsequent legislative treatment of builders and developers. The Court referred to the introduction of Section 100D through the Finance Act, 2020, which separately recognized the activities of builders and developers for the purposes contemplated by that provision. Although Section 100D was not applicable to the tax year involved in the Emaar DHA Islamabad Limited proceedings, namely Tax Year 2009, its definitions were examined to elucidate the legislative understanding of the two categories of commercial activity. The significance of this discussion lies in the recognition that the distinction between a builder and a developer is primarily referable to the nature of the activities undertaken by each, whereas the applicability of Section 36 must independently be determined with reference to the statutory characteristics of a long-term contract. The

subsequent introduction of a particular taxation regime for builders and developers does not, by itself, establish that development arrangements were necessarily excluded from the operation of Section 36 under the earlier statutory framework. Nor does the mere existence of separate legislative definitions conclusively determine the treatment of every transaction undertaken by such persons.

31.The reasoning contained in paragraph 20 of the judgment provides further guidance on the characterization of composite real estate transactions. The Court examined agreements under which purchasers acquired rights in property that had yet to be completed, while the developer undertook continuing obligations to construct and deliver the finished property within an agreed period. In considering the substance of such arrangements, the Court recognized that an agreement for sale may embody more than one contractual obligation, namely, the transfer of ownership rights in the underlying land and the construction and delivery of the developed property. These obligations, though incorporated into a single commercial agreement, may involve distinct elements of performance which are fulfilled progressively over time. The Court further noticed that installment payments made by purchasers were linked with the progress of construction and represented consideration for an undertaking extending beyond a single tax year. It was in this contractual setting that the Court treated the arrangement as falling within the statutory concept of a long-term contract under Section 36. The importance of this reasoning lies in its recognition that the legal character of an agreement cannot necessarily be determined from its title as an agreement for sale. Rather, the agreement must be examined as a whole to ascertain whether it merely contemplates transfer of an existing asset or also imposes substantial obligations involving construction, development and performance over an extended period. The receipt of an installment and the recognition of the entire amount as taxable income are not necessarily synonymous concepts. Depending upon the nature of the agreement and the applicable statutory method of accounting, an amount received may relate partly to obligations already performed and

partly to obligations remaining to be discharged. Where the contract involves continuing performance extending over more than one tax year, the attribution of income to the relevant accounting period requires consideration of the extent to which contractual obligations have been fulfilled. Section 36 of the Ordinance addresses the recognition of income attributable to long-term contracts by reference to the percentage of completion method, subject to the statutory requirements governing its application. The underlying purpose of such treatment is to ensure that income arising from qualifying contracts is attributed to the periods in which the corresponding contractual performance takes place, rather than being determined exclusively by the timing of receipts or the ultimate transfer of legal title. This distinction is of particular importance in development arrangements where the completion of infrastructure, provision of essential facilities and fulfillment of other contractual obligations may continue over successive tax years.

32.The observations made in paragraphs 13 and 20 of Emaar DHA Islamabad Limited, when read together, require consideration in their proper statutory and factual context. Paragraph 13 explains the commercial substance of development activities and examines the absence of an express distinction between developers and construction contractors in the definition of a long-term contract. Paragraph 20 proceeds to consider the actual contractual arrangement and the obligations arising therefrom, particularly the relationship between installment payments, progressive construction and eventual delivery of completed property. The two paragraphs form part of a connected line of reasoning and cannot appropriately be treated as unrelated observations. The former addresses the nature of development activity, while the latter examines whether the particular contractual arrangement possesses the characteristics necessary to attract Section 36. Read in this manner, the judgment illustrates that the application of the percentage of completion method depends upon the substantive obligations arising from the agreement and their fulfillment over the relevant period. It would therefore be necessary to distinguish between a transaction involving the outright sale of

an existing property and one involving the development and delivery of property through progressive performance of contractual obligations. The distinction is founded upon the nature of the transaction rather than the mere nomenclature of the taxpayer.

33.The precedential significance of the aforesaid judgment is further emphasized by the subsequent proceedings before the Hon'ble Supreme Court of Pakistan. As brought to the notice of this Court, the judgment in Emaar DHA was upheld by the Hon'ble Supreme Court, and the review application preferred thereafter was also dismissed. The finality of a judicial determination is an important consideration in the administration of justice, particularly where the interpretation of a statutory provision has been examined by the superior judiciary. Nevertheless, the binding character of such determination must be understood with reference to the legal principle actually decided. The doctrine of precedent does not contemplate an indiscriminate application of every observation contained in a judgment to all subsequent controversies involving the same statutory provision. Rather, it requires the Court to identify the principle essential to the decision and apply that principle to cases presenting substantially comparable legal and factual circumstances. The interpretation of Section 36, therefore, requires attention not merely to the eventual outcome of the earlier litigation but also to the nature of the contractual arrangements considered therein and the manner in which the statutory provisions relating to recognition of income were construed.

34.The Department has additionally relied upon the judgment rendered by this Court in M/s Bahria Town, ITR Nos.92 and 93 of 2024, wherein the applicability of Section 36 to development activities also came under consideration. It has been pointed out during the course of arguments that the said judgment has been challenged before the Hon'ble Supreme Court of Pakistan through CPLA Nos.2121 and 2180 of 2025, which, according to the material placed before this Court, remain pending adjudication. The pendency of proceedings before a superior forum does not, by itself, operate

to suspend the legal effect of the judgment under challenge, nor does it authorize a coordinate Bench to disregard a binding determination merely because its correctness has been questioned in subsequent proceedings. At the same time, the precedential application of a judgment necessarily depends upon the legal issue actually decided and the factual setting in which the relevant principle was formulated. The judgments in Emaar DHA and Bahria Town must, therefore, be examined with due regard to their respective factual foundations and the statutory questions considered therein. Any apparent divergence in the application of Section 36 must be appreciated in the context of the contractual arrangements involved, rather than by assuming that every development activity, irrespective of its nature, is governed by an identical method of recognition of income.

35.Reference has also been made to the judgment concerning Mangla View Resort, which has been cited in conjunction with Emaar DHA Islamabad Limited for elucidating the statutory treatment of income arising from long- term development arrangements. The significance of these authorities lies in the broader question whether the recognition of revenue from contracts involving continuing obligations is to be determined exclusively under the general accounting provisions or whether Section 36 prescribes a distinct method where the statutory conditions are fulfilled. The scheme of the Ordinance requires that income be attributed to the relevant tax year in accordance with the method recognized by law. In the case of long-term contracts, the percentage of completion method serves to allocate income by reference to the performance of contractual obligations over the period of execution, subject to the requirements and limitations imposed by the statute. The treatment of amounts received from customers, including advances or sums reflected as unearned revenue, cannot be determined solely by reference to their receipt or their description in the books of account. The legal character of such amounts must be examined in relation to the obligations remaining to be performed, the extent of performance already undertaken and the statutory rules governing recognition of income. A distinction must accordingly be maintained between the receipt of money

and the recognition of income attributable to a particular tax year, since the two concepts may not necessarily coincide in every contractual arrangement.

36.The foregoing discussion also brings into focus the distinction between the interpretation of a statutory provision and the determination of factual matters concerning its application. Whether a particular development arrangement constitutes a long-term contract within the meaning of Section 36 is a question requiring consideration of the governing statutory language in conjunction with the relevant contractual obligations. On the other hand, the determination of the extent of completion, allocation of expenditure, treatment of advances and verification of supporting accounts necessarily involves examination and appreciation of evidence. The learned Appellate Tribunal Inland Revenue, being the final fact-finding forum under the statutory appellate framework, is entrusted with examining such matters and recording findings on the basis of the material produced before it. The jurisdiction exercised by this Court under Section 133 of the Ordinance is of a distinct and limited character. Although a question concerning the interpretation or application of Section 36 may properly arise for consideration in reference proceedings, the Court is not constituted as another appellate forum for undertaking a fresh scrutiny of accounts or substituting its own assessment of evidence merely because a different conclusion may also be possible. Interference with factual findings necessarily requires identification of a legally cognizable infirmity, such as misapplication of the governing law, material misreading or non-reading of evidence, or a conclusion which is demonstrably perverse or unsupported by the record.

37.In view of the foregoing discussion, it is evident that the applicability of Section 36 of the Income Tax Ordinance, 2001, cannot be excluded merely on the ground that the respondent is engaged in the business of land development rather than conventional construction. The statutory scheme, when examined in conjunction with the principles elucidated in Emaar DHA Islamabad Limited v. Commissioner Inland Revenue, recognizes the

significance of the substantive nature of contractual obligations, the progressive execution of development activities and the corresponding attribution of income to the relevant tax years. The distinction between a builder and a developer, without reference to the underlying contractual arrangements, cannot furnish an independent legal basis for denying the application of the percentage of completion method where the statutory requirements of a long-term contract are otherwise satisfied. Likewise, the general provisions contained in Sections 32, 33 and 34 cannot be interpreted in a manner that renders the specific mechanism contemplated under Section 36 ineffective or redundant. The Department's reliance upon the judgments in Emaar DHA Islamabad Limited, Bahria Town and Mangla View Resort must be appreciated in the context of the legal principles actually determined therein and the contractual arrangements forming the foundation of those decisions. The interpretation advanced by the Department, insofar as it proceeds upon a categorical exclusion of land development activities from the ambit of Section 36, overlooks the distinction between the commercial designation of a taxpayer and the legal character of the transactions undertaken by it. Furthermore, the findings recorded by the learned Appellate Tribunal Inland Revenue concerning the respondent's accounting treatment and recognition of income are required to be examined within the limited jurisdiction conferred upon this Court under Section 133 of the Ordinance, which does not permit a fresh appraisal of factual matters in the absence of any material misreading or non-reading of evidence, perversity, or identifiable error of law. The statutory provisions and judicial principles discussed hereinabove thus provide a coherent legal framework for evaluating the respondent's method of income recognition, while preserving the distinction between the determination of legal principles and the appreciation of factual material undertaken by the competent appellate forum.

38.The State, being the custodian of public interest, is under a corresponding obligation to ensure that the exercise of statutory authority by its instrumentalities remains consistent with the principles of fairness,

transparency, reasonableness and the rule of law. Revenue administration occupies a position of particular importance in this constitutional framework, for the collection of taxes is indispensable to the discharge of the State's functions, while the persons and enterprises contributing to the national exchequer are equally entitled to the protection of law. The authority to assess and recover taxes, however extensive, is neither unregulated nor immune from constitutional scrutiny. It must be exercised strictly within the limits prescribed by law and in a manner which promotes certainty, predictability and confidence in public institutions. The State's legitimate interest in securing revenue cannot be pursued through procedures which impose unnecessary hardship upon taxpayers or deprive them of safeguards expressly provided by the legislature. Indeed, the efficacy of a fiscal system depends not merely upon its capacity to collect revenue, but also upon the fairness, consistency and integrity with which the relevant laws are administered. The constitutional foundation of this obligation is reflected, inter alia, in Article 25 of the Constitution of the Islamic Republic of Pakistan, 1973, which guarantees equality before law and equal protection of law. The guarantee is not confined to a formal declaration of equality; it also requires that statutory powers be exercised upon rational, consistent and non-arbitrary considerations. In this regard, reference may be made to the principles elucidated by the Hon'ble Supreme Court in 1991 SCMR 1041, wherein the constitutional requirement of equal treatment was examined with reference to persons similarly situated. The principle assumes particular significance in administrative and fiscal proceedings, where the exercise of discretionary authority must remain subject to objective standards and the procedural protections established by law. Although every irregularity in administrative action does not necessarily constitute discrimination within the meaning of Article 25, an arbitrary or unjustified departure from the prescribed legal framework may attract constitutional scrutiny, particularly where it results in the denial of a meaningful opportunity to a person whose rights or liabilities are being determined. The constitutional guarantee of equality, read in conjunction with the right to due process under Article 10A,

thus reinforces the obligation of revenue authorities to administer the law fairly, consistently and without caprice.

39.The circumstances attending the assessment proceedings in the present case require consideration against these constitutional standards. The respondent was selected for audit under Section 177 of the Income Tax Ordinance, 2001, in November 2020, whereas the subsequent proceedings culminated in an amended assessment order dated 28.06.2024. Notwithstanding the considerable period during which the matter remained pending before the Department, the show-cause notice under Section 122(9) was issued on 14.06.2024, immediately preceding the Eid-ul-Adha holidays falling between 17.06.2024 and 19.06.2024, with the respondent required to furnish its explanation by 24.06.2024. The practical effect of this sequence was that the respondent was left with only a few effective working days to address the matters raised in the notice, notwithstanding the substantial lapse of time preceding its issuance. Such circumstances are material to the assessment of procedural fairness. Where the Department has itself taken a prolonged period to advance proceedings, the subsequent compression of the taxpayer's opportunity to respond requires particularly careful scrutiny. The statutory power to issue a notice and prescribe a period for compliance must be exercised reasonably, having regard to the nature of the proposed additions, the complexity of the matters involved and the practical ability of the taxpayer to prepare an effective response. The requirement of providing an opportunity of hearing under Section 122(9) of the Ordinance is a substantive safeguard and not an empty procedural formality. Its object is to ensure that a taxpayer, before being subjected to an adverse amendment of assessment, is adequately informed of the proposed action and afforded a genuine opportunity to explain the relevant facts, produce supporting material and contest the legal basis of the proposed additions or disallowances. The mere issuance of a show-cause notice does not, by itself, establish compliance with this requirement. The opportunity must be real, reasonable and effective when assessed in the context of the surrounding circumstances. A notice which formally invites a response but allows

insufficient practical time for its preparation may fail to achieve the very purpose for which the statutory safeguard was enacted. This principle acquires added importance in proceedings involving intricate questions of accounting treatment, recognition of revenue, allocation of expenditure and the interpretation of fiscal provisions. The legitimacy of an assessment is therefore dependent not only upon the existence of statutory authority to make it, but also upon faithful observance of the procedure through which that authority is exercised.

40.The principles of natural justice and the constitutional guarantee of due process require that an affected person be afforded a fair and meaningful opportunity to meet the case advanced against him. These principles are not satisfied by a mechanical or superficial observance of procedural steps where the circumstances render participation ineffective in substance. In fiscal adjudication, the consequences of an adverse assessment may be substantial, and the obligation to observe procedural fairness must accordingly be approached with the seriousness which the nature of the proceedings demands. Administrative convenience, departmental delay or the desire to conclude proceedings expeditiously cannot, without lawful justification, displace the statutory right of hearing. Expediency is undoubtedly an important consideration in the administration of tax laws; nevertheless, it cannot be pursued at the expense of safeguards intended to secure the fairness and legality of the decision-making process. The requirements of reasonable opportunity and fair hearing must be understood as integral conditions of lawful adjudication rather than as technical obligations capable of being satisfied through formal compliance alone.

41.The principle of proportionality also informs the exercise of administrative discretion within the constitutional framework. An administrative measure must bear a reasonable relationship to the legitimate object sought to be achieved and must not impose an excessive or unjustified burden upon the person affected. In assessment proceedings, the objective of determining the correct tax liability is undoubtedly legitimate; nevertheless,

the procedure adopted to achieve that objective must remain proportionate to the nature and complexity of the inquiry. A prolonged period of departmental inaction followed by an exceptionally compressed opportunity for compliance may create an imbalance between the authority exercised by the Department and the procedural rights available to the taxpayer. Such an imbalance is particularly significant where the proposed assessment involves the examination of extensive financial records, contractual arrangements and questions of statutory interpretation. The requirement of reasonable opportunity operates as an essential restraint upon the exercise of fiscal powers and ensures that the pursuit of revenue remains compatible with the broader requirements of lawful administration.

42.The administration of tax laws must also be viewed in the wider context of the relationship between the State and those who contribute to its revenues. Taxpayers, whether individuals, entrepreneurs or corporate entities, play an indispensable role in sustaining public institutions, financing essential services, generating employment and supporting economic activity. The State is unquestionably entitled to recover every tax lawfully due; equally, taxpayers are entitled to expect that such authority will be exercised with fairness, courtesy, consistency and institutional responsibility. These are not competing considerations. A credible fiscal system is one in which lawful collection and procedural justice operate together. The relationship between revenue authorities and taxpayers should, therefore, remain regulatory in purpose, professional in character and conducive to voluntary compliance. The exercise of statutory powers must not assume an unnecessarily adversarial character, nor should the machinery of taxation become a source of avoidable uncertainty, harassment or disproportionate hardship for persons conducting legitimate business activities.

43.Commercial confidence and the effectiveness of revenue administration are closely connected with the predictability of governmental action. Businesses make financial commitments, undertake development projects and arrange their affairs on the legitimate expectation that

applicable laws will be administered consistently and that disputes concerning their liabilities will be determined through fair and transparent procedures. Arbitrary administrative conduct, unexplained delays and unreasonable procedural demands may undermine that confidence and generate avoidable litigation. The resulting consequences extend beyond the immediate dispute, as public resources are diverted towards the resolution of controversies which sound administration could have prevented. It is, therefore, incumbent upon revenue authorities to recognize that the efficient enforcement of fiscal laws requires more than the mechanical exercise of statutory powers. It calls for timely decision-making, careful consideration of the material placed on record, adherence to prescribed procedures and due regard for the dignity and legitimate interests of taxpayers. A system which secures compliance through confidence in its fairness is more consistent with the constitutional principles governing public administration than one which relies upon unnecessary coercion or procedural rigidity.

44.Before parting with the matter, it is appropriate to emphasize that revenue authorities discharge a public trust and are expected to exercise their powers with a corresponding sense of fairness, restraint and responsibility. The legitimate objective of maximizing lawful revenue collection must be pursued through procedures which inspire confidence in the impartiality and integrity of the fiscal system. Taxpayer facilitation should not remain confined to policy declarations or administrative assurances; it must find practical expression in reasonable timelines, transparent decision-making, respectful treatment and faithful compliance with statutory and constitutional safeguards. The dignity of the taxpayer and the authority of the State are not mutually exclusive considerations. On the contrary, the legitimacy of public institutions is strengthened when statutory powers are exercised in a manner that protects individual rights while securing the public interest. The effective administration of tax laws, the encouragement of lawful enterprise and the preservation of confidence in governmental institutions are complementary objectives, each contributing to the stability and prosperity of the State.

45.For the foregoing reasons, having examined the questions referred to this Court in the light of the applicable statutory provisions, the principles governing recognition of income under Section 36 of the Income Tax Ordinance, 2001, the limits of reference jurisdiction under Section 133, and the constitutional and statutory requirements of due process and fair hearing, we are of the considered view that the learned Appellate Tribunal Inland Revenue committed no error of law in annulling the amended assessment order dated 28.06.2024. The proceedings culminating in the said order were materially affected by the denial of a reasonable and meaningful opportunity of hearing as contemplated under Section 122(9) of the Ordinance, and the Department has failed to establish any legally sustainable ground warranting interference with the findings recorded by the learned Tribunal. Consequently, the questions of law referred for our consideration are answered in the NEGATIVE, i.e., against the applicant-Department and in favor of the respondent. Resultantly, the instant Income Tax Reference is DISMISSED, and the impugned order of the learned Appellate Tribunal Inland Revenue dated 18.12.2024 is maintained. The parties shall bear their own costs.

46.A copy of this judgment shall be transmitted to the Registrar of the learned Appellate Tribunal Inland Revenue under the seal of this Court.

(INAAM AMEEN MINHAS) (SHAHRUKH ARJUMAND)

JUDGE JUDGE

Announced in open Court, on 12th day of October, 2026.

JUDGE JUDGE

APPROVED FOR REPORTING.

Tanveer Ahmed/*