COMMISSIONER INLAND REVENUE, LEGAL ZONE, LTO, MULTAN vs AL-HILAL INDUSTRIES (PVT

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COMMISSIONER INLAND REVENUE, LEGAL ZONE, LTO, MULTAN VS AL-HILAL INDUSTRIES (PVT.) LTD. Ss.109, 111 & 122---Re-characterization of income and deduction---Assessing Officer, powers of---Issuance of prior / separate notice for re-characterization of transaction---Whether a requirement--- Appellate Tribunal Inland Revenue non-suited the department and annulled determinations on the ground that no prior notice was issued before embarking upon an exercise of re-characterization of transaction under Income Tax Ordinance, 2001. Validity--- Taxpayer, when asked by the Assessing Officer regarding the nature of transaction, substance and economic rationale thereof, was obligated to justify, explain and substantiate that deduction claimed was in accordance with law and was not intended as a tool to avoid tax. If taxpayer failed to justify the transaction, Assessing Officer was within jurisdiction to examine the true character of the transaction. Assessing Officer was not bound to accept the transaction merely as devised by taxpayer but was entitled to unfold the layering and determine the substance thereof. Such exercise was legally classified as re-characterization of transaction under S.109 of Income Tax Ordinance, 2001. Section 109 starts with the words "for the purposes of determining liability of tax under the Ordinance", showing that re-characterization mechanism is a permissible mode for determining tax liability. Re-characterization is not independent of scrutiny under S.122 of the Ordinance. Piercing the transaction to discover its true character is in essence re-characterization thereof. The process of re-characterization is part of jurisdiction exercised under S.122 of the Ordinance and no separate fresh notice was required before uncovering the substance of transaction. No violation of principles of due process was established as taxpayer was provided opportunity to explain and justify the transaction. High Court remanded the matter to the Tribunal for deciding appeal of the department on merits afresh. Reference application filed by Department was allowed accordingly.

COMMISSIONER INLAND REVENUE, LEGAL ZONE, LTO, MULTAN vs AL-HILAL INDUSTRIES (PVT — 2026 PTD 419 LAHORE-HIGH-COURT-LAHORE

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