When a bank loan, a house purchase, or a conspicuous expenditure does not correspond with your outwardly stated earnings, the Federal Board of Revenue may request a clarification. This provision is found in Section 111 of Pakistan Income Tax Ordinance, 2001 under the heading of unexplained income or assets.

What does Section 111 cover?

According to Section 111 of the Income Tax Ordinance, 2001, the Commissioner is allowed to consider some unexplained items as your income during the year in which they actually belong. There are four triggers listed in law:

1. An unexplained credit in your books,
2. An investment or ownership of money or a valuable article that you cannot finance out of known sources
3. An expenditure that is larger than your claimed resources,
4. Hiding or incorrect/false details of income.

In a case when you are unable to provide a satisfactory evidence-supported explanation, the amount can be added as income.

One of the crucial timing rules: additions on undisclosed income/assets are based on the year of origin/acquisition rather than the one in which FBR found about it. This implies that the tax office will subsequently correct the appropriate prior year assessment when the facts are determined.

The Notice and Your Rights

When you get a notice FBR 111(1) which is usually through IRIS, it is a show-cause explaining certain credits, investments, or expenditure. It has been consistently held by the courts that any assessment cannot be amended under section 122 unless a separate and distinct notice under 111 is issued and that a speaking order concludes such a notice. The tax manual can also be of some assistance here where 111(1)(d) (concealment/inaccurate particulars) states that a net amount, less deductible allowances, is the only amount to be brought into tax. This is significant when the bank deposit consists of reimbursements.

What is considered as good explanation?

Typical proofs include:

• A banking trail of an investment made in the form of salary, business receipts, or savings.
• Gift deed and tax profile of the giver/bank evidence, in case it is a real gift.
• Protect your debt loan contract and the bank/affluence of your lender, in case you have borrowed.
• Property sale proceeds (sale deed, withholding statements) in case you reinvested.
• Business cash-book and evidence of sale, whether deposits are turnover.
• Remittances made by the foreigner using the regular banking system with encashment evidence, duly remitted foreign remittances are subject to a certain degree of protection as per law/circulars (and long-standing case law), as long as you satisfy the conditions.

Note: in case an amount represents a simple pass-through (e.g, funds temporarily deposited and paid out), record both inflow and associated outflow in order to properly determine the net exposure (where there is any)

Responding to a Notice Under Section 111(1)

• Read the notice vigilantly. Trace every item that has been questioned: bank credits, investments, or expenditures. Note the tax year the FBR applies.
• Reconcile your wealth statement and tax return. Create a single page mapping, tracing each amount: source, evidence, date, ledger/bank reference.
• Attach third-party paper. This includes, contracts, pay slips, withholding certificates, deeds, remittances certificates, anything that on its own bears out your explanation.
• Explain timing. In case you have invested on the basis of savings of the previous years, display the closing balances in wealth and the opening balances of the following year.
• File immediately and request a personal hearing. Take IRIS acknowledgements and record and maintain follow-up in writing.

Taxpayer guidance usually emphasizes that responses made and presented fast and in an organized manner with a documented history, are your greatest defense. An item left unattended turns into an addition under Section 111.  

What happens when you are unable to explain your source of income?

In case of a rejection of your explanation (or failure to provide it), the Commissioner will effectively regard the amount as your income and proceed to correct your assessment in the appropriate year as provided in Section 111. The addition does increase in tax payable and may be challenging to pay default surcharge and downstream recovery in case unpaid.

Recent procedural focus you need to know

Tax cases and departmental directions in recent years have tightened the process: any Section 111 notice is obligatory, any Section 111 case must lead to a speaking order, only then can any section 122 reassessment be carries out based on the result. These rulings are often referred to by tax professionals in the defense of clients. Make sure that your response seeks (and obtains) an order based on reason under 111.

Get help from Sidekick to ensure smooth compliance

Professional advice can make a huge difference for those individuals or businesses that struggle under Section 111. Sidekick is one of the top accounting and business-management companies that provides a complete spectrum of services, taxation, accounting, business management, and staff augmentation. The professionals at Sidekick assist their customers in keeping clear financial records, filing tax that comply with all regulations, and balancing all revenues or other assets so that nothing goes unaccounted. Be it an FBR notice 111(1) you have received, or you are just trying to avoid such problems, Sidekick offers customized solutions to organize documents, facilitate compliance, and enhance internal control. With its seasoned accountants and tax specialists, Sidekick helps businesses and individuals to manage the FBR audits with assurance, tackle the notices, and ensure its full compliance with Section 111 of the Income Tax Ordinance.

Conclusion

Section 111 is meant to tax money that slips beyond the stated tax net. However, it includes due-process and evidentiary criteria that you can utilize. Upon receiving a notice under section 111(1) don’t get panic, gather proofs and elaborate on each item, and organize your evidence in reasonable manner. Get professional help if necessary. The courts, by their procedural protections, are now well aware of the distinction that must be made between a fair and an avoidable addition.