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Citation(s)

2023 SLD 563 2023 SCMR 534

Supreme Court of Pakistan

Civil Petitions Nos. 648-L, 649-L and 650-L of 2021, decidedon 31st May, 2022.
Date of hearing: 31st May, 2022. (Againstorder Dated 26.01.2021 passed by
the Lahore High Court,Lahore in I.T.Rs. Nos. 4919, 4922 and 4923 of 2021)
Present: Ijaz ul Ahsan, Munib Akhtar and Sayyed Mazahar Ali Akbar Naqvi, JJ
Ch. Muhammad Shakeel, Advocate Supreme Court, Naeem Hassan, Secretary
(Litigation), FBR for Petitioner (in all cases). Syed Mansoor Ali Bukhari,
Advocate Supreme Court for Respondent (in all cases).

COMMISSIONER INLAND REVENUE, ZONE-II, REGIONAL TAX OFFICE, (RTO)

LAHORE---Petitioner

VS

MIAN LIAQAT ALI PROPRIETOR, LIAQAT HOSPITAL, HOUSE NO.6, STREET

NO.6, LAL PUL, PANJ PIR ROAD, MUGHALPURA, LAHORE-----Respondent

Law: Income Tax Ordinance, 2001

Section: 111(1),111(1)(d),122,122(5),237

(a) Income Tax Ordinance (XLIX of 2001)------Ss. 111(1)(d) & 122(5)---Concealment

of business income from sales---Amendment of deemed assessment order---Words
"chargeable to tax" as used at the end of sub-clause (i) of section 111(1)(d) of the
Income Tax Ordinance, 2001 ['the sub-clause (i)']---Said words applied to the whole of
the sub-clause (i), i.e., also to the suppressed production and/or sales---If "any
amount" can be brought within the scope of sub-clause (i) only if, and to the extent,
that it is "chargeable to tax" (i.e., constitutes "income" properly so called), then
production and sales must be given the same treatment---Thus, it is only production or
sales chargeable to tax that can be brought within the ambit of clause (d) to section
111(1) of the Ordinance---Both under section 122(5) and section 111(1)(d) of the
Ordinance, the taxpayer is exposed to the same tax liability in respect of the income
that has escaped assessment, or been suppressed, i.e., he is liable to tax on the "net"
amount, or "income" properly so called---Appeals were dismissed.

Waris Meah v. The State and another PLD 1958 SC 157 and Jibendra Kishore Achharya

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Chowdhury v. Province of East Pakistan PLD 1957 SC 9 ref.

(b) Income Tax Ordinance (XLIX of 2001)----Ss. 111(1)(d) & 122(5)---Concealment of

business income from sales---Amendment of deemed assessment order---Words
"chargeable to tax" as used at the end of sub-clause (i) of section 111(1)(d) of the
Income Tax Ordinance, 2001 ['the sub-clause (i)']---Said words applied to the whole of
the sub-clause (i), i.e., also to the suppressed production and/or sales---Directions
given by the Supreme Court to the Federal Board of Revenue to align sections 122(5) &
111(1)(d) of the Income Tax Ordinance, 2001 closely with the principles laid down in
the case reported as Waris Meah v. The State and another PLD 1958 SC 157 stated.

In order to further align sections 122(5) and 111(1)(d) of the Income Tax Ordinance,
2001 closely with the principles laid down in the case reported as Waris Meah v. The
State and another PLD 1958 SC 157, Supreme Court directed that the Federal Board of
Revenue (FBR), in exercise of its powers under the Income Tax Ordinance, 2001 ('the
Ordinance') (whether under section 206 and/or section 237 or any other enabling
provision), shall forthwith issue appropriate guidance and provide the necessary
yardstick, measure, guidelines and standard to the tax authorities, consistent with the
present judgment, inter alia as to when and how, and in which circumstances and
against what taxpayers, action can be initiated under the first clause of section 122(5)
on the one hand, or the two sub-clauses of clause (d) of section 111(1) of the
Ordinance on the other; that in issuing such guidelines, the FBR must take into account,
and appropriately incorporate therein, the following points:

(i) If the tax authorities intend to take action against a person within the time period
permissible under section 122, then such action must ordinarily be taken in terms of
subsection (5) (or any other applicable subsection, as the case may be) thereof and in a
manner compliant therewith, rather than under section 111(1)(d). If at all during the
said period the designated Officer of Inland Revenue (OIR) nonetheless intends to
proceed under the latter provision then clear reasons must be given why this is being
done. In respect of such reasons to be given, the onus will lie on the tax authorities to
justify such action and the threshold will be a high one. Furthermore, the reasons will
be subject to judicial scrutiny in terms, inter alia, of the hierarchy of remedies provided
by and under the Ordinance.

(ii) If the tax authorities intend to take action under section 111(1)(d) against a person
beyond or after the time period stipulated under section 122, and the taxpayer shows
that the information on which such action is based was, or ought reasonably to be
regarded either as being or such as could have been, in the knowledge of the tax
authorities within the said time period, then the tax authorities will have to give reasons
as to why action was not taken under section 122 --- The reasons to be given by the
OIR if the taxpayer meets the initial burden cast upon him will be subject to judicial
scrutiny in terms, inter alia, of the hierarchy of remedies provided by and under the

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Ordinance.

ORDER

MUNIB AKHTAR, J.---These matters were disposed of by means of the following short
order:

"We have heard learned counsel for the parties at considerable length and carefully
gone through the case record. For reasons to be recorded later, these petitions are
converted into appeals and dismissed."

The matters arose under the Income Tax Ordinance, 2001 ("Ordinance"), in relation to
the tax years 2016 to 2018 of the same taxpayer (respondent herein). The question of
law for the consideration of which the leave petitions were converted into appeals is set
out in para 6 below.

2. The respondent filed his returns for the years in question, declaring rental income as
well as business income, by way of practicing homeopathic medicine. It appears
(though this is not relevant for present purposes) that an audit was conducted for at
least one tax year, and the return (deemed assessment order) amended. Thereafter, on
or about 12.03.2019, a complaint was received by the concerned income tax authority
(being the designated officer of Inland Revenue, herein after "the OIR") that the
respondent had underreported (i.e., suppressed or concealed) his sales (and thus
business income) from the practice of homeopathy. The OIR initiated enquiries on the
complaint in respect of each tax year and on the basis of the details/record obtained
concluded that there was "definite information" available within the meaning of section
122(8) of the Ordinance to warrant amendment of the deemed assessment orders.
Accordingly, show cause notices were issued to the respondent on or about 13.11.2019
under section 122(5) (read with subsection (9)). The notices expressly made reference
to the definite information that had been acquired by the OIR. Thus, the proceedings so
far were entirely within the four corners of section 122. The importance of this will
emerge later.

3. It appears that in the reply submitted to the notices the respondent essentially did
not deny the allegations but sought to produce evidence/ material as regards the costs
(i.e., expenses) incurred for the sales made (but not declared) so that the income
chargeable to tax (under the head "income from business") could be properly
calculated. The OIR now made a decisive shift in the proceedings. The respondent was
intimated that the concealed sales attracted the provisions of section 111(1)(d) of the
Ordinance. It was also stated that the said provision had to be read with section 39
(which relates to the head "income from other sources") with the result that no
deductions in relation to any other head of income was permissible in the computation
of income. This meant that the costs and expenses incurred in making the concealed

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sales (or such of them as would have been permissible deductions under the head
"income from business") could not be taken into account. In the event, specific notices
under section 111(1)(d) were issued on or about 12.12.2019. The respondent was
called upon to show cause why, in terms of the said provision, the whole of the
concealed sales ought not to be brought to tax. The replies filed by the respondent were
found not to be satisfactory and the deemed assessment orders were amended on or
about 16.01.2020 in terms of section 111(1)(d).

4. Being aggrieved by the foregoing, the respondent filed appeals before the CIT
(Appeals), which were dismissed by a consolidated order dated 08.06.2020. The
respondent took the matter further to the Appellate Tribunal, and there met with
success. The learned Tribunal gave a consolidated decision on 08.10.2020. After noting
that the respondent had placed before the OIR the costs and expenses incurred in
respect of the concealed sales the Tribunal held that the authorities below had erred in
concluding that the same were not to be taken into account while computing the
amount that could be brought to tax under section 111(1)(d). The said expenditures
were reproduced by the Tribunal in its order and it was thereafter observed as follows
(emphasis supplied):

"It is evident from above that all items of trading/profit accounts were drastically
different. It is however, noted that the OIR was not justified to make addition under
section 111(1)(d) of the ITO, 2001. It is simple proposition that sales of goods
invariably involves cost of sales and even gross business income is the difference of
sales and cost of sales. The OIR had clear knowledge of sales as well as purchases
declared by the appellant through reply. Obviously, Sales were made after having
purchased the goods, therefore, treating sales alone as income without considering
purchases was illegal and baseless action in the presence of purchases, allegation of
suppression of sales was not valid and did not warrant addition under section 111(1)(d)
of ITO, 2001.

It is also obvious that the taxpayer had suppressed both sales and purchase but it was
in fact the difference of sales and purchase (gross profit) which was allegedly concealed
for the purposes of charge of income tax. Since Profit and Loss account expenses
mentioned in the revised chart (submitted through reply) have been ignored by both
the below authorities for the reason that the provisions of section 111 of ITO, 2001 are
punitive in nature, therefore, no verifiable credit can be given to the appellant, is highly
misconceived and misdirected, therefore, in our opinion, the actual suppressed income
will be the difference of gross profit admittedly, derived by the taxpayer. It is an
admitted fact that the taxpayer submitted all relevant documents qua expenses and it is
evident that taxpayer explanation was not considered during the proceedings and it is
clearly mentioned that explanation must be considered for the action under section 111
of the ITO, 2001 and this procedural lapse does not render the taxpayer punishable.
The impugned order is, therefore, modified in so far as addition of concealed income is

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reduced to RS.5,869,126/-, Rs.4,927,638/- and Rs.4,944,029/- including rental

incomes for the tax year 2016, 2017 and 2018 respectively."

5. Being aggrieved by the decision of the learned Tribunal the Commissioner filed tax
references before the High Court, which were dismissed by (identical) orders dated
26.01.2021. The learned High Court upheld the reasoning that had found favor with the
learned Tribunal. It is against the said orders that the Commissioner sought leave to
appeal from this Court.

6. During the course of the hearing it became clear that the leave petitions raised an
important question with regard to the proper understanding and application of section
111(1) (d). After a full hearing the leave petitions were disposed of in terms of the
short order noted above, while converting them into appeals to consider the following
question of law:

"Whether, in the facts and circumstances of the case, the Commissioner has properly
interpreted and applied section 111(1)(d) of the Ordinance?"

As is clear from the short order, this question was answered against the Department
and in favor of the taxpayer, with the result that the appeals stood dismissed. We now
set out the reasons for our decision.

7. Before proceeding further we may note that we are here concerned only with clause
(d) of subsection (1) of section 111. Whether, and if so in what manner and to what
extent, the analysis and reasons given herein apply also to the other three clauses of
the subsection is left open for consideration in an appropriate case.

8. The answer given to the question posed above requires, for reasons that will become
clear, a consideration of section 122(5) in addition to section 111(1)(d). For ease of
reference, these provisions are set out below in table form, as applicable over the tax
years in question:
Section 111: Unexplained income or Section 122: Amendment of
assets assessments
(5) An assessment order in respect of
tax year, or an assessment year, shall
(1) Where - . . . (d) any person has
only be amended under subsection (1)
concealed income or furnished
and an amended assessment for that
inaccurate particulars of income
year shall only be further amended
including --- (i) the suppression of any
under sub-section (4) where, on the
production, sales or any amount
basis of definite information acquired
chargeable to tax; or
from an audit or otherwise, the
Commissioner is satisfied that-
(ii) the suppression of any item of (i) any income chargeable to tax has
receipt liable to tax in whole or in part, escaped assessment; (ii) or total
and the person offers no explanation income has been under-assessed, or

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about the nature and source of the ... assessed at too low a rate, or has
suppression of any production, sales, been the subject of excessive relief or
any amount chargeable to tax and of refund; or (iii) any amount under a
any item of receipt liable to tax or the head of income has been mis
explanation offered by the person is classified.
not, in the Commissioner's opinion,
satisfactory, the ... suppressed amount
of production, sales or any amount
chargeable to tax or of any item of
receipt liable to tax shall be included in
the person's income chargeable to tax
under head "Income from Other
Sources" to the extent it is not
adequately explained.

Two points may be noted. Firstly, in section 122(5), for the words "definite information
acquired from an audit or otherwise" the words "audit or on the basis of definite
information" were substituted by the Finance Act, 2020. That change does not apply in
relation to the tax years in question in the facts and circumstances of the case before
us but also, in our view, does not in any case have any material bearing on the analysis
and reasoning given herein. Secondly, there are also other subsections of section 122
whereby the deemed assessment order can be amended (or, more precisely, re-
amended). While we focus on subsection (5) for analytical purposes, whatever is said
herein in relation thereto applies, mutatis mutandis, in respect of the other such
subsections as well.

9. Before us, learned counsel for the Department focused attention on sub-clause (i) of
clause (d) of section 111(1). The case put forward was that it was this provision that
was applied by the OIR (and correctly so) as there had admittedly been suppression
(i.e., concealment) of sales by the respondent. Learned counsel for the respondent
submitted that the OIR had misconstrued this provision, and the correct approach was
that as taken by the learned Tribunal. The submissions became more refined during the
course of the hearing and the point in issue boiled down to this: whether the words
"chargeable to tax" as used at the end of sub-clause (i) applied only to the phrase
immediately preceding it (i.e., "any amount") or to the whole of the sub-clause, i.e.,
also to the suppressed production and/or sales? If the former, then the approach taken
by the Department was correct; if the latter, then the view taken by the Tribunal was to
be preferred. This was so because if the suppressed production or sales were only such
as were "chargeable to tax" that could be so only by taking the permissible deductions
(by way of expenses and costs incurred) into account. Sales or production, in and of
themselves, are not (generally) liable (i.e., chargeable) to tax, except as may otherwise
be provided in the 2001 Ordinance (e.g., by way of imposing a "final tax"); such
exceptions are legion and, so it sometimes seems, increasing all the time. It is (again,
generally) only the "net" amount (i.e., receipts minus costs/expenses) that is
chargeable to tax. (The receipts are usually referred to as "gross receipts" or "gross

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income".) It is the "net" amount that, looking at the matter conceptually and in terms
of the settled principles that underpin income tax law, is regarded as "income" properly
so called, and liable to tax. As noted above, the learned Tribunal took the view that
since section 111(1) (d) was a "punitive" provision it was this approach that was to be
taken. On the other hand, if the words "chargeable to tax" did not apply to sales or
production, then it was only the "gross" amount thereof that was relevant, and the
whole of it could be brought to tax under the head "income from other sources". This
was of course the contention of learned counsel for the Department.

10. Clause (d) of section 111(1) confers a power on the Commissioner to bring to tax
unearthed income, i.e., income which was concealed by either suppression of sales or
production or any amount chargeable to tax (sub-clause (i)) or suppression of any item
of receipt liable to tax, in whole or in part (sub-clause (ii)). Although the word
"including" appears to indicate that the two sub-clauses are but particular and non-
exhaustive instances of a more general provision (viz., concealment of income or
furnishing of inaccurate particulars of income), it is at least arguable that the situations
itemized in the sub-clauses are exhaustive. This is so because the concluding part of
subsection (1) specifically mentions (insofar as clause (d) is concerned) only the income
unearthed from the situations particularized in the sub-clauses as liable to inclusion in
the taxpayer's income under the head "income from other sources", and not generally
to concealed income or income not declared by reason of furnishing of inaccurate
particulars. However, we are, in the facts and circumstances of the present case,
concerned with the specific situation contained in sub-clause (i), i.e., suppression of
sales and therefore it is not necessary to give a definitive answer to this aspect of
clause (d).

11. Having considered the point, we are of the view that there are at least two reasons
why the Department's view cannot prevail and the one taken by the Tribunal is to be
preferred. Firstly, on the Department's reading of the provision, sub-clause (i) of clause
(d) creates two categories: production or sales on the one hand, and "any amount
chargeable to tax" on the other. In respect of the first category it is the "gross receipts"
or "gross income" that can, in its entirety, be taxed. In respect of the other, it is only
"income" properly so called that can be made liable. Why there should be such a
distinction is not readily apparent. It is true that in respect of the interpretation of fiscal
statutes the State is given greater latitude in respect of choosing what is to be taxed
(or exempted) and if so, in what manner and to what extent. However, this approach is
but a rule of interpretation (and one among several) that aids the Court in coming to
the correct conclusion with regard to the provision under consideration. It is not an
absolute rule, to be applied rigidly and strictly to the exclusion of all else. Production
and sales are two types of activity that produce income. However, as is well established,
income is a very broad and inclusive concept. In the felicitous words of Kanga and
Palkhiwala: "The categories of income are never closed" (see Fawad Ahmad Mukhar and
others v. Commissioner Inland Revenue and another 2022 SCMR 426, para 9 and the

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authorities there cited). To pick out only two types of income (production and sales) and
treat those "gross receipts" as liable to tax, out of the vast sea that otherwise
constitutes "income" properly so-called ("any amount chargeable to tax") is in our view
not the correct approach. No discernable yardstick or standard appears in the provision
as would justify such differentiation and radical departure from settled principles of
income tax law. Like should (unless otherwise lawfully dictated) be treated alike. If "any
amount" can be brought within the scope of sub-clause (i) of clause (d) only if, and to
the extent, that it is "chargeable to tax" (i.e., constitutes "income" properly so called),
then production and sales must be given the same treatment. Thus, it is only
production or sales chargeable to tax that can be brought within the ambit of clause
(d). The categorization made by the Department is artificial and cannot be accepted.
The approach taken by the learned Tribunal was correct.

12. The second reason why we came to the foregoing conclusion is, perhaps, not so
obvious but no less important for that. It requires a consideration of the power
conferred on the Commissioner under section 122(5), and its comparison with clause
(d) of section 111(1). (Needless to say, the powers of the Commissioner under both
provisions are invariably exercised by the OIR.) Looking at section 122(5) first, this
provision enables the OIR to amend the deemed assessment order so as to ensure that
the correct amount of tax is levied (and thereafter paid or recovered, as the case may
be). Three categories of situations are envisaged. The power to amend can be exercised
only if the facts and circumstances of the case come within the scope of any of the
three clauses and then also, only (for the tax years in question, in the context of the
appeals now before us) if there is "definite information" available. Furthermore, the
power to amend can only be exercised within a specified period and not thereafter
(which is, broadly speaking, five years as computed within the framework provided by
subsections (2) and (4)). The first of the three clauses of subsection (5) provides for
the situation where "any income chargeable to tax" has escaped assessment. Quite
obviously, what can be brought to tax here is "income" properly so called, and not
"gross receipts" or "gross income" as such.

13. Let us now compare the foregoing position with the two sub-clauses of clause (d) of
section 111(1). Both require for there to be "suppression", which would be of
production, sales or any amount chargeable to tax in the case of sub-clause (i), and
"any item of receipt liable to tax in whole or in part" in the case of sub-clause (ii).
Clearly, anything that has been "suppressed" within the meaning of these sub-clauses is
income (or leads to income) that has been escaped assessment within the meaning of
clause (i) of section 122(5). Put differently, at first sight it would seem that the
situations envisaged in the two sub-clauses of clause (d) of section 111(1) overlap with,
or are equivalent to, the situation envisaged by the first clause of section 122(5).
However, this would not be wholly so in respect of sub-clause (i) of clause (d) on the
Department's interpretation. On that approach, other than production or sales, "any
amount chargeable to tax" would indeed overlap with "any income chargeable to tax

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[as] has escaped assessment". This is so because in both cases, it is the "net" amount,
i.e., income properly so called, that would be brought to tax. In respect of production or
sales the position would however be different. If section 122(5) were to be applied it
would be only so much of the production or sales as result in a "net" amount, i.e.,
income properly so called, that would be regarded as having escaped assessment and
hence liable to tax. However, if section 111(1)(d) were to be applied in the manner as
understood by the Department it would be the "gross" amount, i.e., the whole of the
production or sales suppressed, that could be brought to tax. Clearly, this would not be
the same as what is provided by clause (i) of section 122(5). More precisely, the tax
liability determined under the two provisions would be different, and the gap could be
quite significant, depending on the facts and circumstances of the case.

14. Now, if we assume for the moment that the Department's approach is correct then
for present purposes the crucial point is this. The Ordinance provides no yardstick,
guidance, standard or measure when or how, in respect of the same thing (i.e.,
suppressed or concealed production or sales), it is section 111(1)(d) that is to be
applied or section 122(5). The matter is left at the unfettered discretion of the OIR. He
is the sole judge of whether it is the former or the latter provision that is to be applied.
It is his unencumbered wish and choice. But, as just seen, the tax liability is worked out
quite differently under the two provisions. It follows that in this scenario the amount of
tax with which the taxpayer is to be burdened is entirely at the arbitrary will of the tax
authority. And indeed, this is precisely what happened in the present case. As noted
above, the OIR (quite correctly) started proceedings under section 122(5) and (again
quite correctly) having gathered the material/record as constituted definite information
issued show cause notices in terms of the said provision. But as soon as the taxpayer
raised the point of determining the "net" amount, i.e., income properly so called, he
pivoted and took off on an entirely different direction. Effectively abandoning section
122(5), he simply opened proceedings under section 111(1)(d). There, as per the
Department's interpretation, he was wholly unencumbered with any considerations of
determining the "net" amount, and could bring the whole of the "gross receipts" to tax.
As found by the learned Tribunal that led to a substantially inflated tax liability for the
respondent.

15. The foregoing consequence, which follows necessarily and inevitably from the
Department's interpretation inasmuch as it hands an unfettered discretion to the OIR, is
not merely startling. It is, in our view, entirely impermissible. This is so because it is
contrary to the rule, repeatedly affirmed and applied, laid down by this Court in the
leading case of Waris Meah v. The State and another PLD 1958 SC 157. It is to consider
this rule that we must now turn.

16. The dispute in Waris Meah arose out of the Foreign Exchange Regulation Act, 1947
("Act"). At issue was the constitutionality of certain amendments made to the Act, the
appellants' case being that the same were violative of the equality provision of the 1956

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Constitution (Article 5, which is in pari materia the present Article 25). As presently
relevant, prior to the said amendments a person guilty of an offence under the Act
could be tried under section 23 thereof (read with the relevant provisions of the Code of
Criminal Procedure) only by a court of criminal jurisdiction. Furthermore, the
prosecution could only be launched by a person authorized by the Central (i.e., Federal)
Government or the State Bank of Pakistan. By the impugned amendments (made in
1956) three new sections were inserted, being sections 22A, 23A and 23B. On a close
examination, the Court discerned the following differences between section 23 on the
one hand and the newly added provisions on the other (pp. 163-4; emphasis supplied):

"(1) that under section 22A an offender against the Act can only be proceeded against
either in a Court under the ordinary law or before a Tribunal under section 23B or
before an Adjudication Officer under section 23A ;

(2) that when proceeded against under the ordinary law the sentence on conviction
may be that of imprisonment, and if the case is committed to the Court of Session, of
fine in any amount;

(3) that if convicted by the Tribunal, the accused must be awarded a sentence of
imprisonment, and the sentence of fine may be in any amount, though there have been
no commitment proceedings and the trial has not been held with the aid of a jury or
assessors;

(4) that if the accused is taken before an Adjudication Officer, he cannot be sentenced
to imprisonment and the maximum penalty that can be imposed upon him cannot
exceed three times the value of the amount involved in the commission of the offence;

(5) that whether a person is to be tried under the ordinary law or by a Tribunal or by an
Adjudication Officer depends on the will of the Central Government or of the State
Bank; and

(6) that though the State Bank in the exercise of its functions may under section 25 be
controlled by general or special directions of the Central Government, the Central
Government itself has as uncontrolled and unrestricted power to decide how each
offender has to be dealt with."

The challenge to the amendments under Article 5 was sustained in the following terms
(pp. 167-8; emphasis supplied):

"... In the present case, the question to be determined is whether the impugned Act is
ex facie discriminatory, and we have no hesitation in saying that it is. Three tribunals
with different powers and procedures have been set up. The Act creating them contains
no indication as to which class or classes of cases are to go before a Court and which

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before the Tribunal and the Adjudication Officer and it does not impose upon the Central
Government, the obligation, or expressly confer on it the power, of making rules with a
view to classifying the cases to be tried by each of these tribunals. Nor does it define
the principle or policy on which such classification may be made by the Central
Government or the State Bank. The Central Government has not exercised its power of
issuing any directions to the State Bank or of making any rules under section 27 for
carrying into effect the provisions of the Act. The result, therefore, is that in the present
state of the law no person who is alleged to have contravened any provision of the Act
can know by which Court he is to be tried, and the question whether on conviction he
shall be punished with imprisonment or should be punished with imprisonment and fine
which may extend to any amount, or whether he should be let off with a mere penalty
of three times the value of the amount involved rests entirely on the action that the
Central Government or the State Bank may choose to take.

It was contended on behalf of the State that in the present cases, it could not be said
that discretion had not been exercised in a fair and reasonable manner by the State
Bank, in electing to send the cases to a Tribunal. On the allegations, the cases were of a
serious character, and merited severe punishment. The mischief of the Act is, however,
not susceptible of so simple a cure. It confers discretion of a very wide character upon
stated authorities, to act in relation to subjects falling within the same class in three
different modes varying greatly in severity. By furnishing no guidance whatsoever in
regard to the exercise of this discretion, the Act, on the one hand, leaves the subject,
falling within its provisions, at the mercy of the arbitrary will of such authority, and, on
the other, prevents him from invoking his fundamental right to equality of treatment
under the Constitution.

The Constitution declares in Article 5(1) that "All citizens are equal before law and are
entitled to equal protection of law" and Article 4(1) provides that "Any existing law . . . .
. in so far as it is inconsistent with the provisions of this Part, shall, to the extent of
such inconsistency, be void." That duty of declaring that a law is void, for violating a
Fundamental Right defined in Part II rests on the Courts. That duty cannot be
performed, so as to ensure that a law operates equally in relation to all persons within
its mischief, if the law itself provides for differential operation in relation to such
persons, not in accordance with any principle expressed or implicit in the law, not on
the basis of any classification made by or under the law, but according to the unfettered
discretion of one or more statutory authorities.

Here, not only is there discretion in the specified authorities whether they will proceed
at all against any member of the class concerned, viz. offenders against the Act, but
there is also an unfettered choice to pursue the offence in any one of three different
modes which vary greatly in relation to the opportunity allowed to the alleged offender
to clear himself, as well as to the quantum and nature of the penalty which he may
incur. The scope of the unguided discretion so allowed is too great to permit of

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application of the principle that equality is not infringed by the mere conferment of
unguided power, but only by its arbitrary exercise. For, in the absence of any discernible
principle guiding the choice of forum, among the three provided by the law, the choice
must always be, in the judicial viewpoint, arbitrary to a greater or less degree. The Act,
as it is framed, makes provision for discrimination between persons falling, qua its
terms, in the same class, and it does so in such manner as to render it impossible for
the Courts to determine, in a particular case, whether it is being applied with strict
regard to the requirements of Article 5(1) of the Constitution."

The appeals were accordingly allowed and the convictions and sentences set aside.

17. Waris Meah, and another decision rendered sometime earlier and relied upon (at
pp. 166-7), Jibendra Kishore Achharya Chowdhury v Province of East Pakistan PLD 1957
SC 9, continue to constitute in many important respects the bedrock on which the
equality jurisprudence rests. In our view, the principles laid down in Waris Meah apply
fully to the provisions now under consideration. This is especially so if the Department's
approach and interpretation were correct. An untrammeled discretion is conferred on
the tax authorities, without any guidance, yardstick, measure or standard for applying
either of two provisions, which result in different (and possibly hugely variant, as is the
situation in the cases at hand) tax liabilities being thrust upon and incurred by the
taxpayer. Different taxpayers, or even the same taxpayer in respect of different tax
years, may be treated either under the one or the other provision with divergent
obligations to pay tax, even though the position may essentially be the same. And this
result may be brought about even by the same OIR. As held in Waris Meah, the
taxpayer may be treated with greater or lesser severity, all at the sweet will,
unencumbered discretion and unguided choice of the tax authorities. On the other
hand, if the view that prevailed with the learned Tribunal is accepted, then the
differential disappears. Both under section 122(5) and section 111(1)(d), the taxpayer
is exposed to the same tax liability in respect of the income that has escaped
assessment, or been suppressed, i.e., he is liable to tax on the "net" amount, or
"income" properly so called. The Department's interpretation is therefore not
sustainable, being contrary to settled principles established by the jurisprudence of this
Court. This is the second reason why we came to the conclusion as noted above.

18. This does not however quite end the matter. Simply by holding, as we do, that sub-
clause (i) of clause (d) is to be interpreted and applied in the manner as indicated does
not fully close the divergence or "gap" between section 122(5) and section 111(1) in
the context of the principles enunciated in Waris Meah. For one thing, there continues
to be a complete lack of guidance or any standard by which the OIR is to be guided as
to which of the two provisions is to be applied, and in what circumstances. Thus, at a
basic level the inconsistency with Waris Meah remains. This can potentially have serious
consequences. For example, as noted above, while there is a five year time limit within
which an assessment order can be amended under section 122(5), there now appears

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to be no such constraint in respect of section 111(1)(d). (We may note that earlier,
subsection (4)(b) of section 111 had provided for a time limit of five years. However,
this clause was omitted by the Finance Act, 2010. This situation, detrimental to the
taxpayers, cannot remain unaddressed if at all, as they must, the two provisions are to
be applied in a manner consistent with Waris Meah.

19. In order therefore to further align the two provisions more closely with Waris Meah,
we hereby direct the Federal Board of Revenue, in exercise of its powers under the
Ordinance (whether under section 206 and/or section 237 or any other enabling
provision), to forthwith issue appropriate guidance and provide the necessary yardstick,
measure, guidelines and standard to the tax authorities, consistently with this
judgment, inter alia as to when and how, and in which circumstances and against what
taxpayers, action can be initiated under the first clause of section 122(5) on the one
hand, or the two sub-clauses of clause (d) of section 111(1) on the other. In issuing
such guidelines, the FBR must take into account, and appropriately incorporate therein,
the following points:

a. If the tax authorities intend to take action against a person within the time period
permissible under section 122, then such action must ordinarily be taken in terms of
subsection (5) (or any other applicable subsection, as the case may be) thereof and in a
manner compliant therewith, rather than under section 111(1)(d). If at all during the
said period the OIR nonetheless intends to proceed under the latter provision then clear
reasons must be given why this is being done.

b. If the tax authorities intend to take action under section 111(1)(d) against a person
beyond or after the time period stipulated under section 122, and the taxpayer shows
that the information on which such action is based was, or ought reasonably to be
regarded either as being or such as could have been, in the knowledge of the tax
authorities within the said time period, then the tax authorities will have to give reasons
as to why action was not taken under section 122.

It may be noted, as to point (a) above, and in respect of the reasons to be given, that
the onus will lie on the tax authorities to justify such action and the threshold will be a
high one. Furthermore, the reasons will be subject to judicial scrutiny in terms, inter
alia, of the hierarchy of remedies provided by and under the Ordinance. As regards
point (b) (the purpose of which is to prevent the tax authorities from, as it were, simply
running down the clock), the reasons to be given by the OIR if the taxpayer meets the
initial burden cast upon him will be subject to judicial scrutiny in terms as just stated.

20. The Office is directed to transmit a copy of this judgment to the Chairman, FBR to
ensure compliance. The foregoing are the reasons for which the appeals were
dismissed.

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