LHC Restricts FBR’s Revisional Tax Amendment Powers

The Rawalpindi Bench of the Lahore High Court has curtailed the Federal Board of Revenue’s (FBR) power to reopen deemed assessments, holding that Section 122(5A) of the Income Tax Ordinance, 2001 cannot be invoked for speculative reassessment or exploratory revenue recovery proceedings.

The ruling was rendered in an Income Tax Reference titled Commissioner Inland Revenue v. Sajid Hussain Gondal & Others, decided by a Division Bench comprising Justice Mirza Viqas Rauf and Justice Jawad Hassan. The reference was instituted under Section 133 of the Ordinance to challenge the decision of the Appellate Tribunal Inland Revenue (ATIR), which had annulled an amendment made to a deemed assessment for Tax Year 2019.

The taxpayer had originally filed a return that attained the status of a deemed assessment under Section 120. Subsequently, the Additional Commissioner Inland Revenue issued a show-cause notice under Sections 122(9), 111(1), and 122(5A), alleging discrepancies relating to declared income, purchases, expenses, deductions, and capital declarations.

The Department contended that such discrepancies rendered the assessment erroneous and prejudicial to the interest of revenue, thereby justifying amendment under Section 122(5A). The amended assessment, passed in June 2022, was affirmed by the Commissioner (Appeals). However, in November 2023, the ATIR set aside the amendment, declaring the exercise of jurisdiction unlawful.

In its detailed judgment, the High Court reaffirmed the legal sanctity attached to deemed assessments under Section 120, observing that such assessments cannot be disturbed unless strict statutory preconditions are satisfied. The Court distinguished between Sections 122(5) and 122(5A), clarifying that Section 122(5) is applicable where audit material or definite information establishes escaped income or under-assessment, whereas Section 122(5A) confers revisional jurisdiction only where an order is simultaneously erroneous and prejudicial to the interest of revenue.

The Bench categorically held that both conditions must co-exist. Mere suspicion, computational variations, or perceived revenue implications do not satisfy the statutory threshold.

The Court further emphasized that Section 122(5A) does not confer unfettered authority to reopen concluded assessments and cannot be employed for fishing or roving inquiries. Any assertion of prejudice to revenue must be demonstrably established in law, rather than inferred or presumed.