The Income Tax Ordinance, 2001 (the Ordinance) requires taxpayers to self-assess their income and assets and report them to the Federal Board of Revenue by way of a tax return. Such return is treated as an assessment order under the Ordinance.
Proceedings under the Ordinance can be commenced by the income tax department in a number of ways including by issuing notices under: section 120(3) where the return is incomplete; section 121(1) where a taxpayer has not filed a return; section 122(5) where the Commissioner is satisfied, on the basis of audit or definite information, that the assessment order requires to be amended; section 122(5A) where the assessment order requires to be amended because it is erroneous insofar as it is prejudicial to the interests of revenue and under section 161(1), where a person fails to deduct tax required to be withheld or fails to deposit tax withheld.
While sections 120, 121 and 122 prescribe time limits for issuance of notices, there is no such stipulation in section 161 of the Ordinance. By way of context, section 174(3) of the Income Tax Ordinance, 2001 (the Ordinance) to retain specified records, documents and accounts relating to a tax year for a period of 6 years after the end of such tax year, except where proceedings in respect of that tax year are already pending. In a recent judgment (in Civil Petition No. 1691-L of 2018) authored by Mr. Justice Mansoor Ali Shah, a three member bench of the Supreme Court applied this time limit to notices issued by the tax department under section 161 of the Ordinance and to notices under other provisions which do not prescribe a time limit. The time limit applies where such notices cannot be responded by the addressee without reference to the records required to be maintained under section 174 of the Ordinance.
The subject of the case before the Supreme Court was a notice issued in 2017 seeking to recover tax required to be withheld by the taxpayer in 2007 and 2009 under section 161(1A) of the Ordinance and requiring the taxpayer to furnish statements of withholding tax under section 165(2B) of the Ordinance and reconciliation under rule 44(4) of the Income Tax Rules, 2002. In a challenge by the taxpayer, the Lahore High Court set aside the notice on the ground that the tax department could not have required the taxpayer to furnish records relating to tax years 2007 and 2009 after the passage of 6 years from the end of those tax years. The judgment of the Lahore High Court was challenged in the Supreme Court by the tax department. The Supreme Court dismissed such challenge and upheld the judgment of the Lahore High Court.
The significant conclusions in the judgment of the Supreme Court are as follows:
(1) The time limit under section 174(3) of the Ordinance applied to any notice to which a taxpayer could not reply without referring to the records that the Ordinance required taxpayers to maintain. This time limit applied even where the provision of the Ordinance under which such notice is issued does not prescribe any time limit. The Court clarified that the time limit did not apply to proceedings relating to periods for which the records are already in the possession of the tax department.
(2) The 6 year time limit under section 174(3) of the Ordinance was in the nature of a statutory protection afforded to taxpayers and could not be extended by the tax department to the taxpayers’ detriment. The Supreme Court disapproved of the High Court judgment in Habib Bank Limited v Federation of Pakistan (2013 PTD 1659) which held that the tax department could extend the time limit if it was able to justify the delay in initiating proceedings against a taxpayer.
(3) The time limit under section 174(4) could not be extended under section 214A of the Ordinance, which empowers the Federal Board of Revenue (or a Commissioner duly authorised) to extend time limits for actions that are required by the Ordinance to be undertaken within a stipulated period.
Underpinning the conclusions in the judgment was the Supreme Court’s characterisation of the Ordinance as being “largely structured around time-framed provisions in order to make the taxing mechanism certain and transparent and the tax administration and tax governance smarter and efficient.”
By holding that time limit under section 174(3) of the Ordinance operates as a substantive defence against notices issued after its expiry, and not merely as a provision delineating the duration of the record maintenance obligation under the Ordinance, the judgment has resolved much of the ambiguity surrounding the time limit applicable to notices issued under provisions of the Ordinance which do not prescribe any time limit. Further, given the Supreme Court’s pronouncement that such time limit cannot be extended, taxpayers will be assured that they cannot be confronted with notices which require them to refer to records older than those that they are required to maintain under the Ordinance.
Note: This article is not intended to provide legal advice and no legal or business decision should be based on its content. It is intended to provide information of general interest about current legal issues.
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