ISLAMABAD: The Appellate Tribunal Inland Revenue (ATIR), Islamabad, has urged the Federal Board of Revenue (FBR) to establish a coordinated verification system with provincial authorities to prevent taxpayers from misusing the agricultural income tax exemption to justify unexplained wealth and assets.
In its latest order, a two-member ATIR bench observed that although genuine agricultural income is exempt from federal income tax, the exemption should not become a tool for concealing undeclared income or explaining investments and assets without supporting evidence.
The tribunal directed the FBR chairman to examine the possibility of developing a verification mechanism in coordination with provincial revenue departments and agricultural income tax authorities.
The ATIR has recommended several measures to verify agricultural income claims, including:
Data sharing: Establishing information-sharing arrangements between the FBR and provincial revenue and agricultural income tax authorities.
Tax verification: Checking provincial agricultural income tax payments on a year-by-year basis against landholdings and applicable provincial laws.
Land records: Directly verifying ownership, mutation and tenancy records.
Crop assessment: Using area-specific agricultural benchmarks to assess crops, production and expected yields.
Sale proceeds: Examining agricultural product sales through markets (mandis), commission agents and banking transactions.
Wealth reconciliation: Comparing declared agricultural income with taxpayers’ wealth statements and asset accumulation.
Risk-based scrutiny: Introducing targeted verification and coordination between provinces to identify suspicious claims.
The tribunal emphasised that the objective is not to bring genuine agricultural income under federal taxation but to prevent the misuse of the exemption available under the law.
It further clarified that taxpayers should not be treated as ineligible for agricultural income merely because they live away from their agricultural land or do not personally own the land. Genuine agricultural activities and income must remain protected.
The order has been forwarded to the FBR chairman and Member (Legal) for consideration and necessary action.
The tribunal’s observations emerged from a case involving a Sahiwal-based taxpayer who declared agricultural income of Rs4.5 million annually for Tax Years 2020, 2021 and 2022, followed by Rs4.7 million for Tax Year 2023.
During the same period, the taxpayer also declared salary or business income of less than Rs1 million in each year.
The case came under scrutiny following an investigation report. In response to the proceedings, the taxpayer mainly relied on a cultivation agreement relating to approximately 37 acres of agricultural land in Renala Khurd, District Okara, involving a consideration of Rs23.68 million.
However, the tax authorities questioned the authenticity and reliability of the agreement, pointing out that no mutation had been recorded and the stamp duty paid was insufficient.
The taxpayer also failed to provide important supporting documents, including:
Land ownership records (Fard-e-Malkiat).
Khasra Girdawari records.
Evidence of crops cultivated and agricultural production.
Records of agricultural input purchases.
Evidence of crop sales and related proceeds.
Furthermore, the taxpayer’s business profile showed three business concerns but did not establish any agricultural activity.
Another important factor was the payment of provincial agricultural income tax.
According to the case record, the taxpayer deposited only Rs273,000 in provincial agricultural income tax on December 5, 2024, after receiving a notice under Section 111(1) of the Income Tax Ordinance, 2001.
The assessing officer compared this payment with an alleged federal tax liability of Rs2.249 million.
Due to the absence of satisfactory supporting evidence, the tax authorities treated the claimed agricultural income and Rs4.5 million declared as opening net assets as unexplained amounts under Section 111(1).
The Commissioner Inland Revenue (Appeals) subsequently upheld the additions made by the assessing officer.
The ATIR’s observations highlight the importance of maintaining proper agricultural records when claiming agricultural income as exempt from federal income tax.
Taxpayers declaring substantial agricultural income may be required to substantiate their claims through land records, cultivation agreements, crop production details, provincial tax payments, sale receipts and banking records.
The proposed FBR-provincial verification mechanism could also improve scrutiny of agricultural income declarations and help distinguish genuine agricultural earnings from fictitious claims used to explain unexplained wealth.
The tribunal has stressed that the exemption for genuine agricultural income must be preserved while preventing its misuse under the Income Tax Ordinance, 2001.
