IHC rules foreign remittances cannot be treated as unexplained solely for lack of PKR encashment

The Islamabad High Court has held that foreign currency remitted through legitimate banking channels cannot automatically be treated

ISLAMABAD : The Islamabad High Court has held that foreign currency remitted through legitimate banking channels cannot automatically be treated as unexplained income merely because the funds were not converted into Pakistani rupees or an encashment certificate was not produced.

The ruling, reported as 2026 SLD 882, was issued in Income Tax Reference No. 254/2015, decided on October 8, 2025, by a division bench comprising Justice Babar Sattar and Justice Sardar Ejaz Ishaq Khan in Commissioner Inland Revenue, Zone-I, RTO Islamabad vs Anushay Usman.

The judgment concerned funds used for the purchase of immovable property in Islamabad by a UAE-based company, M/s Diallog Broadband FZC. The funds were transferred from accounts maintained in the UAE through regular banking channels into foreign currency accounts in Islamabad, with payments subsequently made directly to the property sellers.

According to the judgment, the relevant banking records, transaction details and source of funds were provided to the tax authorities. The properties were also reflected in the company’s audited accounts.

The tax authorities, however, treated the investment as unexplained, primarily because the foreign currency had not been encashed into Pakistani rupees through a scheduled bank and no encashment certificate had been produced under Section 111(4) of the Income Tax Ordinance, 2001.

The matter eventually reached the Appellate Tribunal Inland Revenue, which examined the banking trail and concluded that the source of the funds had been satisfactorily explained. The tribunal annulled the demand, prompting the Federal Board of Revenue to approach the Islamabad High Court.

The FBR argued that Section 111(4) required foreign remittances to be encashed into Pakistani rupees through a scheduled bank and supported by the relevant certificate before they could qualify as a valid source of investment.

The taxpayer’s counsel maintained that the funds had been lawfully transferred through normal banking channels and that the complete trail from the UAE to the property sellers was available. The counsel further argued that Section 111(4) provided a specific immunity and was not the only method through which the source of foreign funds could be established.

The Islamabad High Court dismissed the FBR references and upheld the tribunal’s decision.

The court observed that Section 111 is a machinery provision rather than a charging provision. According to the judgment, where a taxpayer provides a reasonable and verifiable explanation regarding the nature and source of funds, the tax authority must consider that explanation fairly and cannot reject it arbitrarily.

The court further clarified that Section 111(4) operates as a statutory carve-out or immunity. Where its specified conditions are fulfilled, the tax authority cannot require a further explanation within that provision. However, failure to satisfy the encashment requirement does not automatically make every foreign remittance unexplained if its source can otherwise be established through credible evidence.

The court also noted that maintaining foreign currency accounts is legally permissible and that taxpayers may reasonably choose such accounts rather than converting funds into rupees, including because of differences between market and bank exchange rates.

Additionally, the court identified a procedural issue, observing that the Commissioner had not properly initiated separate proceedings under Section 111 before proceeding under Section 122.

The court ultimately held that the source of the funds had been satisfactorily explained and that the demand raised against the respondent was not sustainable, dismissing the references accordingly.