LHC Curbs FBR’s Suo Motu Powers

The Lahore High Court’s Rawalpindi bench has restricted the Federal Board of Revenue’s suo motu authority to amend deemed tax assessments, ruling that Section 122(5A) of the Income Tax Ordinance, 2001, cannot be used for roving or speculative inquiries.

The judgment sets a clear legal boundary on the use of revisional powers, emphasizing that such authority is not meant for broad revenue recovery efforts without a solid legal basis.

The ruling came in an income tax reference titled Commissioner Inland Revenue versus Sajid Hussain Gondal and others, where Justice Mirza Viqas Rauf and Justice Jawad Hassan provided detailed guidance on the scope of amendment powers under Section 122.

The reference, filed under Section 133, challenged an Appellate Tribunal Inland Revenue decision that had set aside an amendment made to a taxpayer’s deemed assessment for the tax year 2019.

The taxpayer had originally filed a return under Section 120, which became a deemed assessment. Later, the Additional Commissioner Inland Revenue issued a show cause notice citing discrepancies in gross revenue, purchases under Section 236A, deductions under Section 153, profit and loss expenses and capital declarations.

The department argued that these discrepancies made the assessment erroneous and harmful to revenue, justifying action under Section 122(5A).

Despite the taxpayer’s explanation, the assessment was amended in June 2022 and upheld by the Commissioner’s Appeals before being struck down by the Appellate Tribunal in November 2023. The tribunal ruled that the use of Section 122(5A) in this case was unlawful, a position later upheld by the High Court.

In its judgment, the LHC clarified that a deemed assessment under Section 120 cannot be unsettled lightly and drew a distinction between Section 122(5) and Section 122(5A). It stated that Section 122(5) applies where there is audit-based or definite information indicating escaped income, under assessment, misclassification or excessive relief.

“The revisional jurisdiction under Section 122(5A) is not a licence for roving or fishing inquiries,” the court observed, reinforcing limits on the discretionary powers of tax authorities.

In contrast, Section 122(5A) is revisional in nature and can only be invoked when an assessment is both erroneous and prejudicial to the interest of revenue. The bench stressed that both conditions must exist together and that suspicion, mismatch or perceived revenue loss alone does not meet the legal threshold.

The court further held that Section 122(5A) does not grant open-ended authority to revisit assessments, but is limited to correcting clear and apparent errors that are demonstrably harmful to revenue. It emphasized that the alleged error must be evident from the record and the claimed prejudice must be legally demonstrable rather than based on conjecture.