Law: Income Tax Ordinance, 2001

Section: 121(1)(d), 214C, 174(2)

  Summary The taxpayer filed an appeal against the decision of the Commissioner Inland Revenue (Appeals) [CIR(A)], who had reduced expense disallowances from 30% to 20%. The disallowances were made by the tax authorities under Section 174(2) of the Income Tax Ordinance, 2001 due to lack of supporting evidence for expenses (purchases and P&L expenses). The taxpayer argued: Notices were not properly served. Disallowances were arbitrary and based on estimation. Past records (Tax Year 2016) had no such disallowance. The department argued that the order was lawful and justified. Tribunal’s Findings The Tribunal found: Notices were issued, but the taxpayer failed to respond or provide evidence. The taxpayer did not produce any material to support claims even at the appellate stage. Under Section 174, the burden is on the taxpayer to substantiate expenses. In absence of evidence, disallowance is legally valid. CIR(A) had already taken a lenient view by reducing disallowance to 20%. Core Point 👉 If a taxpayer fails to provide documentary evidence for claimed expenses, tax authorities are legally justified in disallowing those expenses under Section 174—even on an estimated basis—and such disallowance will generally be upheld unless the taxpayer proves otherwise. Outcome The Tribunal found no merit in the appeal. Appeal dismissed. O r d e r Nasir Mahmud (Member) : This appeal has been preferred against the order dated 15.02.2021 passed by the Commissioner Inland Revenue (Appeals), hereinafter referred to as “CIRA”. The learned CIRA, while deciding the appeal arising out of the order dated 31.01.2019 passed by the Deputy Commissioner Inland Revenue, Unit-I, ZoneVII, CRTO, Lahore, was pleased to hold that; “……………..the officer made add backs u/s 174(2) of the Ordinance. Sub section (2) of Section 174 gives authority to the officer to fully or partially disallow the claim of expenses which are not supported by any evidence. However, add backs have to conform to norms of reasonability. Ex-parte assessment has to be a “best judgment assessment” and not a punishment for the taxpayer.…