The appellant/taxpayer has filed the titled appeal against the Order dated 30.10.2023 passed by the learned Commissioner Inland Revenue (Appeals), Islamabad [CIRCA)] whereby, the assessment order passed under section 122 of the Income Tax Ordinance, 2001 (The Ordinance, 2001) was confirmed.

1. The brief facts of the case are that the taxpayer being an individual e-filed his income tax return for the tax year 2016 by declaring taxable income at Rs.1,018,648/- and agricultural income at Rs.3,500,000/-. The return was deemed to be assessed under section 120(1) of the Ordinance, 2001. However, the additional Commissioner- IR (assessing officer) on examination of the assessment record concluded that the same was erroneous in so far as prejudicial to the interest of the revenue for reason that no agriculture income tax was paid. Show-cause notice under section 122(9) of the Ordinance, 2001 issued on 27.11.2020 for compliance, wherein the taxpayer was confronted to submit documentary evidence regarding payment of agricultural tax. In response thereto, the taxpayer submitted a written reply, which was found unsatisfactory. Consequently, proceedings were finalized by making an addition under section 111(1)(d) of the Ordinance under the head "Income from other sources" at Rs.3,500,000/-, vide order passed under section 122(5A) of the Ordinance on 30.06.2022. The appellant filed an appeal against the said order before the learned ACIR(A), who vide his order dated 30.10.2023 confirmed the order passed under section 122(5A) of Ordinance, 2001. Dissatisfied with this decision, the appellant has now brought the matter before this tribunal by filing an appeal under section 131 of the Ordinance, 2001, hence the present proceedings.
2. Mr. Muhammad Khurshid, Advocate appeared on behalf of the appellant and Mr. Shumail Tareen, the learned DR represented the tax department.
3. The learned AR argued that the Assessing Officer unlawfully added the appellant's agricultural income, derived from land located within the boundaries of Islamabad Capital Territory, to the taxable income. The AR contended that there is currently no legal framework in place for the charging of agricultural income tax on land situated in Islamabad Capital Territory. As a result, the agricultural income should be exempt from taxation under the provisions of Section 41 of the Income Tax Ordinance, 2001. The AR further asserted that, since agricultural income from land in Islamabad Capital Territory is not subject to any tax or levy, the proviso to subsection 1(d) of Section 111 of the Ordinance, 2001, which relates to unexplained income or assets, does not apply to the appellant's case. The learned AR asserted that the assessing officer failed to issue a separate notice and order under section 111 of the Ordinance, 2001, thereby rendering the entire proceeding unwarranted by law. In conclusion, the AR requested that the appellant's appeal be accepted, and the addition made by the Assessing Officer be set aside. On the other hand, the learned Departmental Representative (DR) contended that while it is undeniable that the appellant earned income from agricultural land, the exemption applies only if agricultural income tax has been paid, as specified in the proviso to subsection 1(d) of Section 111 of the Income Tax Ordinance, 2001. The DR argued that, as the appellant has admittedly not paid any agricultural income tax, the tax demand raised by the Assessing Officer is justified. In support of the tax authorities' actions, the learned DR requested the dismissal of the appellant's appeal.
4. We have carefully considered the arguments advanced by both the learned AR of the appellant and the learned DR, and have reviewed the relevant provisions of law and record of the appeal file. The primary issue in dispute is whether the agricultural income earned by the appellant from land situated within Islamabad Capital Territory is subject to income tax under the Income Tax Ordinance, 2001. The appellant's position, as represented by the learned AR, is that no legal framework exists for the imposition of agricultural income tax on land within Islamabad Capital Territory. As such, this income is exempt from tax under Section 41 of the Ordinance, 2001. Additionally, the appellant argues that the proviso to subsection 1(d) of Section 111, which applies to unexplained income or assets, is not relevant in this case because the agricultural income in question is not taxable. Section 41 of the Income Tax Ordinance, 2001, clearly provides an exemption for agricultural income; however, this exemption is subject to the application of section 111(1) of the Ordinance, 2001 which for the sake of complete understanding and due diligence, is being reproduced hereunder:

Provided that where a taxpayer explains the nature and source of the amount credited or the investment made, money or valuable article owned or funds from which the expenditure was made, by way of agricultural income, such explanation shall be accepted to the extent of agricultural income worked back on the basis of agricultural income tax paid under the relevant provincial law.
The key phrase in the relevant legal provision is "paid tax under the provincial law." This refers to agricultural income tax levied by the provinces. However, in the present case, the appellant's agricultural land is not located within the jurisdiction of any of the provinces of Pakistan. Instead, the land is situated within Islamabad Capital Territory, which does not fall under provincial control. Significantly, there is no existing law that imposes agricultural income tax within the boundaries of Islamabad Capital Territory. Unlike the provinces, which are empowered to levy agricultural income tax under their respective laws, Islamabad Capital Territory is governed by federal law, and no corresponding federal legislation has been enacted to impose such a tax. Consequently, the agricultural income derived from land within this territory cannot be subject to agricultural income tax, as no mechanism or law exists to impose or collect it. In this context, the appellant's position is clear: the absence of any legal requirement to pay agricultural income tax within Islamabad Capital Territory means that the appellant's income from such land is exempt from taxation under Section 41 of the Ordinance, 2001. Furthermore, since no tax is payable under any provincial law due to the specific location of the land, the proviso to subsection 1(d) of Section 111 of the Ordinance, which concerns unexplained income or assets, does not apply. The income in question is explained and fully accounted for and is not subject to taxation under the law.

1. As there is currently no agricultural income tax imposed on land situated within Islamabad Capital Territory, the income derived from such land is exempt from federal income tax. Furthermore, the proviso to subsection 1(d) of Section 111, relied upon by the learned DR, applies only when unexplained income or assets are found and are subject to tax under the provisions of the Ordinance. In the present case, the agricultural income is fully explained and documented, and since it falls within the ambit of the exemption provided by Section 41, the proviso to Section 111(1)(d) does not apply. We also note that the Assessing Officer has not provided sufficient reasoning or legal basis to justify the addition of the appellant's agricultural income to the taxable base, especially given the exemption provided under Section 41 of the Ordinance, 2001. It is also important to highlight that the tax department has not asserted that the appellant's agricultural land is located within the jurisdiction of any province, which would make it subject to provincial laws regarding the levy of agricultural income tax. If the department had claimed that the appellant's land was situated in a province, the appellant would have been liable to pay agricultural income tax in accordance with that province's tax laws. However, since no such claim has been made and the land is within Islamabad Capital Territory, where no provincial laws apply, the imposition of agricultural income tax does not arise in this case. Therefore, the tax demand created by the Assessing Officer is not sustainable in law.
2. In light of the above legal position and the facts of the case, we hereby accepts the appellant's plea and directs the deletion of the addition made by the Assessing Officer. The appellant's appeal is thus allowed, and the orders of the tax authorities are annulled.
3. This order consists of five (05) pages, and I have affixed my signature on each page.
4. (Trib.)Appeal allowed.