The Supreme Court has suspended the judgment of Sindh High Court (SHC) regarding the declaration of foreign income assets and liabilities of resident taxpayers.

A three-judge bench, headed by Justice Umar Ata Bandial, on Monday, heard an appeal of Commissioner Inland Revenue AEOI, Karachi against the SHC’s verdict.

Advocate Hafiz Ahsaan Ahmad Khokhar, representing the Federal Board of Revenue (FBR), said that the resident taxpayers have challenged the show-cause notices proceedings issued under new legal amendments in the Income Tax Ordinance, 2001, introduced through Finance Act, 2018, whereby, every resident taxpayer under Section 116A (1), Section 109A of ITO, 2001 was required to separately declare their foreign assets, incurring foreign expenditure, earning foreign income and owning foreign liabilities through separate Foreign Income and Asset Statement, starting from Tax Year 2019. He said the default consequences for failing to comply are mentioned under new Section 182(1) at Serial 1AAA of the Income Tax Ordinance (ITO), 2001.

Ahsaan argued that the respondents are resident taxpayers and undoubtedly have foreign assets and foreign income, but failed to file their tax returns being resident taxpayers for the tax year 2019 as per Section 116A (1) of the ITO.

He maintained that the SHC’s impugned judgment held that in the absence of notified format required under Section 116A (2) of the ITO, and whereas, nothing has been concealed nor there is any consequence, either on income or tax liability, of petitioners for non-filing of foreign income and Assets Statement along with the return of income for the tax year 2019, as required under Section 116A1; therefore, the penal provisions under Section 182 (2) of the Ordinance could not be invoked.

He submitted that the SHC also held that the department failed to establish wilful default or mens rea on the part of petitioners/ taxpayers in the subject cases; therefore, notices under section 182 (2) could not be validated and declared as illegal and resultantly of no consequence.

He said on default, if the show-cause notices were issued for their tax explanation then how did the department failed to establish wilful default at this stage.

According to the FBR appeal, after the amendments in the ITO, under the jurisdiction of AEOI Zone, Karachi alone, 650 taxpayers were required to file the foreign income and assets statement under Section 116A (1) along with tax return for tax year 2019. The counsel submitted that out of the total, 433 taxpayers duly complied and filed the statement in time as required under the amended law.

The department issued show-cause notices to the remaining 217 taxpayers upon established default. Out of them, 182 taxpayers complied with the notices, and filed replies and adopted the due course provided under the ITO amended provisions. The rest (35) of the taxpayers did not file replies and challenged the notices before the SHC, which decided in their favour.

The counsel submitted that the SHC has failed to appreciate and ignored the correct application of new amendments made through Finance Act, 2018 in Section 116A (1) and Section 182(1) at Serial (1AAA) of the ITO that the legislature is empowered to tax foreign income earned from Offshore Trusts and Companies controlled by resident Pakistanis.

Hafiz Ahsaan argued that the SHC failed to appreciate that Foreign Income and Assets Statement under Section 116A (1) are different in nature and provide different financial positions of taxpayers and serves the different purposes of resident taxpayers for the financial transparency in Pakistan. He stated that the subject petitions were premature and not maintainable against these show-cause notices, adding only replies were sought and neither any assessment order was not passed nor adjudication was finalized against taxpayers. He said the remedy along with complete process for challenging the same, if aggrieved, has been prescribed and was available with tax payers under different provisions of the Income Tax Ordinance, 2001; therefore, the impugned judgment is liable to be set aside.

He said the high court invalidated show-cause notices proceedings in constitutional jurisdiction, adding that the superior courts held that when regular adjudication proceedings were pending before the authority under the Special Taxing Statutes then those need to be responded and resolved before the Authority and the Forums, provided under the statute for such purpose, and any departure from such legal procedure would amount to frustrate the proceedings initiated by the public functionaries under the law.

He also submitted that the SHC ought to have looked into the matter with different angles as to whether compliance of law at the time of invoking show-cause notices proceedings has been made or if any of the provisions has been omitted or violated then what prejudice is likely to cause to the taxpayer to whom show-cause notice was given. He said; however, in the instant case, no prejudice was caused to the taxpayers as the compliance of the relevant law was made by the department without any malafide and jurisdictional defect.

He stated that as these aspects have been totally ignored, while passing the impugned judgment; therefore, it is liable to be set aside.

The bench after hearing the arguments accepted the contentions of the FBR and issued a leave granting order and suspended the judgment of the SHC.

The story was originally published in Business Recorder on January 11, 2021.