Full Judgment Text & Judicial Ruling

2025 P T D 1364 [Islamabad High Court] Before Babar Sattar, J Messrs PAKISTAN TELECOMMUNICATION AUTHORITY through Director (Budget and Accounts) and others Versus FEDERATION OF PAKISTAN for the purpose of service through Chairman Federal Board of Revenue, Islamabad and 3 others Writ Petitions Nos. 181 of 2019, 4497 and 4558 of 2022, decided on 18th December, 2024. (a) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 2(63), 4 & 147---Advance tax---Assessment, collection and adjustment---Scope---Charge is created under S. 4 of Income Tax Ordinance, 2001 on income of taxpayer to discharge advance tax liability---Advance tax is an impost in view of S. 4(6) read together with S. 147 of Income Tax Ordinance, 2001, and squarely falls within the definition of tax under S. 2(63) of Income Tax Ordinance, 2001---Tax authorities are empowered under S. 147(7) of Income Tax Ordinance, 2001 to use collection machinery for purposes of collecting advance tax computed as payable in accordance with Ss. 147(4) and (4B) of Income Tax Ordinance, 2001 subject to filing of any estimate by taxpayer under proviso to S. 147(6) of Income Tax Ordinance, 2001---This reflects that payment of advance tax is not optional but is a liability to be discharged by taxpayer unless the taxpayer falls within the carve-outs provided under Ss. 147(1) and (2) of Income Tax Ordinance, 2001---Merely because liability accrues without assessment of income tax does not make payment of advance tax optional or excludes advance tax from the definition of tax for purposes of S. 2(63) of Income Tax Ordinance, 2001---Fact that loability in relation to advance tax accrues and becomes payable without assessment is then catered for in S. 147(8), (9) and (10) of Income Tax Ordinance, 2001---Advance tax paid in each quarter is treated as a tax credit that is set off against total income tax liability for the tax year as determined once an assessment has taken place after the expiry of tax year and total tax liability for such tax period crystallizes---Advance tax is only a provisional payment to the extent that tax liability of taxpayer for relevant tax year remains to be assessed and the sum paid in the form of advance tax remains adjustable in terms of tax liability as assessed. (b) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 137, 138, 140 & 147(4), (4B), (5), (5A), (5B), (6) & (7)---Advance tax---Estimate, non-filing of---Effect---Advance tax is income tax and is liable to be paid as and when it becomes due in terms of Ss. 147(5), (5A) and (5B) of Income Tax Ordinance, 2001---In order to effect recovery of such tax liability, tax department is at liberty to employ, in terms of S. 147(7) of Income Tax Ordinance, 2001 the collection and recovery provisions of Income Tax Ordinance, 2001---In an event that a taxpayer does not file estimate under S. 147(6) of Income Tax Ordinance, 2001 and also does not discharge its advance tax liability as computed in accordance with S. 147(4) or (4B) of Income Tax Ordinance, 2001 as applicable or taxpayer files an estimate which is rejected and such order is not stayed and the taxpayer does not comply with such order, tax department can then exercise authority under S. 147(7) of Income Tax Ordinance, 2001 to undertake collection under S. 137 of Income Tax Ordinance, 2001 and if such liability is not voluntarily discharged by tax payer, seek recovery under Ss. 138 and 140 of Income Tax Ordinance, 2001. (c) Income Tax Ordinance (XLIX of 2001)--- ----Ss. 137, 138, 140 & 147---Constitution of Pakistan, Art. 10A---Advance tax---Recovery---Procedure---Due process of law---Scope---Issuance of notices under Ss. 137 and 138 of Income Tax Ordinance, 2001 are also required as taxpayer may have filed an estimate for purposes of S. 147(6) of Income Tax Ordinance, 2001 which may then have been rejected by tax department in exercise of authority under second proviso of S. 147(6) of Income Tax Ordinance, 2001 or proviso to S. 147(6B) of Income Tax Ordinance, 2001 as applicable, in which case due date for payment of advance tax would have already passed---Tax department initially invites taxpayer to discharge liability to pay advance tax on a voluntary basis under S. 137 of Income Tax Ordinance, 2001 failing which it may notify the taxpayer of its intention to use its coercive powers under S. 138 of Income Tax Ordinance, 2001 to recover advance tax---This is the scheme for collection and recovery of advance tax, which has been incorporated by virtue of S. 147(7) of Income Tax Ordinance, 2001---Any recovery affected without issuing such notices would be in breach of requirements of S. 147(7) of Income Tax Ordinance, 2001 read with Ss. 137 and 138 of Income Tax Ordinance, 2001 and fall foul of taxpayer's right to due process guaranteed by Art. 10A of the Constitution and would be illegal. (d) Income Tax Ordinance (XLIX of 2001) --- ----Ss. 137, 138, 140 & 147(4), (4B), (5), (5A), (5B), (6) & (7)---Advance tax---Adjustment---Notice of recovery, non-issuance of---Annulment of reassessment order---Coercive measures---Attachment of bank accounts---Petitioner / taxpayer was aggrieved of recovery of tax amount by authorities after attaching its bank account---Validity---Notice under S. 147 of Income Tax Ordinance, 2001 was issued on 01-09-2022 prior to the annulment of reassessment order---No notice under S. 137 of Income Tax Ordinance, 2001 was issued after annulment of reassessment order and notice under S. 138(1) of Income Tax Ordinance, 2001 was also issued on 18-11-2022 after annulment of reassessment order---Tax department coercively affected recovery of advance tax computed on the basis of an annulled reassessment order on 28-11-2022---Such action was taken by tax department in full view of the fact that reassessment order stood annulled---Recovery of advance tax liability computed on basis of annulled reassessment order was colorable exercise of authority that suffered from illegality---High Court declared such recovery notices illegal along with recovery coercively recovered from the petitioner / taxpayer---High Court directed Commissioner Income Tax to process application for refund claimed by petitioner / taxpayer within a period of sixty days and while making such order would also consider if any additional payment for delayed refund was due to the petitioner in terms of S. 171 of Income Tax Ordinance, 2001---Constitutional petition was allowed, in circumstances. Karachi Port Trust, Karachi v. Commissioner Inland Revenue, Karachi 2011 PTD 1996; Fauji Fertilizer Company Ltd. v. Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 3 others 2018 PTD 719; Messrs Pakistan LNG Limited v. Federation of Pakistan, through Secretary Revenue Division, Ministry of Finance, Islamabad and 2 others 2022 PTD 1763; Commissioner of Income Tax v. Messrs Habib Sugar Mills Ltd. 1993 PTD 343; Sui Northern Gas Pipelines Limited v. Federation of Pakistan and others 2017 PTD 1774; Haidar Industries through Managing Partner and others v. Federation of Pakistan through Secretary 2016 PTD 2004; Elahi Cotton Mills Limited v. Federation of Pakistan PLD 1997 SC 582; Whitney v. Inland Revenue Commissioners AIR 1926 AC 37; National Power Parks Management Company (Pvt.) Ltd. v. FBR and others 2020 PTD 1001; Nadeem Ahmed Advocate v. Federation of Pakistan 2013 SCMR 1062; The Collector of Sales Tax v. Messrs Super Asia Muhammad Din and Sons 2017 PTD 1756; Gul Taiz Khan Marwat v. Registrar, Peshawar High Court PLD 2021 SC 391; Commissioner of Income Tax v. Khalid Textile Mills 2017 SCMR 813; Chairman Central Board of Revenue v. Messrs Pak-Saudi Fertilizer Ltd. 2001 SCMR 777; Commissioner of Income Tax v. Sethi Flour Mills 2015 PTD 394; Pak-Saudi Fertilizers Limited v. Federation of Pakistan and others 1999 PTD 4061; Lone Cold Storage, Lahore v. Revenue Officers, Lahore Electronic Power Co. and others 2010 PTD 2502; Commissioner (Legal) Inland Revenue v. E.N.I. Pakistan (M) Ltd., Karachi 2011 PTD 476; Messrs Pak Telecom Employees Trust v. Federation of Pakistan and others Writ Petition No. 2426 of 2016 and Messrs First Micro Finance Bank Ltd. v. Federation of Pakistan and others 2023 PTD 1095 ref. Ch. Naeem ul Haq, Ch. Imran ul Haq and Ch. Faheem ul Haq for Petitioners. Osama Shahid for the Tax Department (in Writ Petition No.181 of 2019). Ghulam Qasim Bhatti for the Tax Department (in Writ Petitions Nos. 4497 and 4558 of 2022). Aqeel Akhtar Raja and Raja Muhammad Jawad Arslan, Assistant Attorney General for Respondents. Date of hearing: 4th December, 2024. JUDGMENT BABAR SATTAR, J.----Through this judgment, this Court will decide the afore-titled Writ Petitions as they involve interpretation of Section 147 of the Income Tax Ordinance, 2001 ("2001 Ordinance"), even though the relevant facts are distinct in each case and will be addressed accordingly. Relevant Factual Background 2. In Writ Petition No.181 of 2019 the petitioner has impugned a notice dated 27.12.2018 issued under Section 147 of the 2001 Ordinance, and a notice dated 27.12.2018 issued under Section 140 of the 2001 Ordinance pursuant to which a recovery was coercively affected from the bank account of the petitioner maintained with the National Bank of Pakistan. 3. Pursuant to notice dated 27.12.2018 the Tax Department put the petitioner on notice that it had not discharged its obligation to pay advance tax in accordance with the liability calculated pursuant to the formula provided under Section 147(4) of the 2001 Ordinance. It was the petitioner's contention that it filed an estimate in terms of Section 147(6) of the 2001 Ordinance to reflect that no advance tax was payable and instead a significant refund was overdue to the petitioner from tax year 2018. The Tax Department, without waiting for a response to the notice dated 27.12.2018 or issuing any other notice under Section 137 or Section 138 of the Income Tax Ordinance, issued a notice under Section 140 of the 2001 Ordinance also dated 27.12.2018 and attached the bank account of the petitioner and recovered an amount of PKR 1,376,231,788. The Tax Department disputed the filing of a tax estimate. 4. In Writ Petition No.4497 of 2022 the petitioner has impugned a notice issued under Section 147 of the 2001 Ordinance dated 01.09.2022, a notice issued under Section 138(1) of the 2001 Ordinance dated 18.11.2022, and a notice issued under Section 140 of the 2001 Ordinance dated 28.11.2022 pursuant to which the bank accounts of the petitioner were attached and an amount of approximately Rs.49 million was recovered from the petitioner. 5. The petitioner had filed the tax return for tax year 2021. The Tax Department reassessed the tax payable and raised the demand of Rs.1.96 billion by order dated 11.08.2022. The petitioner filed an appeal against the assessment order and Commissioner Inland Revenue (Appeals) annulled the assessment order by appeal order dated 27.09.2022. The Tax Department, however, issued a notice under Section 147 of the 2001 Ordinance dated 01.09.2022 and calculated advance tax on the basis of the assessment order dated 11.08.2022. The Tax Department then issued a notice under Section 138(1) of the 2001 Ordinance dated 18.11.2022 when the assessment order dated 11.08.2022 stood annulled. The Tax Department subsequently issued a notice under Section 140 of the 2001 Ordinance on 28.11.2022 and affected recovery from the petitioner's bank account on the same date. In response to the notice under Section 138(1) of the Income Tax Ordinance, the petitioner had filed a response by letter dated 23.11.2022 stating that no advance tax was payable and the petitioner fell within the exclusion provided under Section 147(1)(d) of the Income Tax Ordinance. After partial recovery was affected by the Tax Department on 28.11.2022, the petitioner filed a second response letter with the Tax Department dated 29.11.2022, which provided an estimate as to why the advance tax demand being generated by the Tax Department was not correct or due. 6. In Writ Petition No.4558 of 2022, the petitioner has impugned notice under Section 147 of the 2001 Ordinance dated 01.09.2022, a notice under Section 138(1) of the 2001 Ordinance dated 26.09.2022, and a notice under Section 140 of the 2001 Ordinance dated 10.11.2022 pursuant to which coercive recovery in the amount of Rs.35.27 million was recovered from the petitioner's account. 7. The petitioner in response to notice under Section 147 of the 2001 Ordinance filed an estimate for purposes of Section 147(6) of the 2001 Ordinance dated 16.9.2023 stating that an advance tax in the amount of Rs.2,340,047/- was payable for the quarter as opposed to the demand of Rs.35,273,136/- generated by the Tax Department. After receipt of notice under Section 138(1) of the Income Tax Ordinance, the petitioner filed another detailed response by letter dated 27.09.2022 explaining how there had been a dip in the revenue of the petitioner by virtue of end of Covid-19 pandemic and reduction in laboratory testing as a consequence thereof. Without responding to such letter or rejecting the estimate filed (which in tax year 2023 the Tax Department had no statutory authority to reject as the second proviso of the Section 147(6) of the 2001 Ordinance (inserted by Finance Act, 2018) had been omitted by the Finance Act, 2021), the Tax Department affected coercive recovery in exercise of authority under Section 140 of the 2001 Ordinance on 10.11.2022. Arguments of the learned counsel for the parties 8. The learned counsel for the petitioner, in Writ Petition No.181 of 2019, submitted that the petitioner's case is that there was no advance tax due to be collected from the petitioner under Section 147 of the 2001 Ordinance as the tax return for the tax year 2018 reflected a refund due. He further submitted that a notice for payment of advance tax was issued on 27.12.2018 without seeking to recover the amount or issuing of any notice under Sections 137 and 138 of the Income Tax Ordinance. The recovery was affected on 27.12.2018 from the petitioner's bank in exercise of authority under Section 140 of the Income Tax Ordinance. He submitted that the demand notice itself reflects that it does not include any bar code and no notices were issued through the IRIS System. The case is one of a malfeasance where without serving any notices on the petitioner, funds were collected from the petitioner's bank and the tax return for the year 2019 also created a refund for the petitioner, which further confirms that the amount coercively recovered was not due to be paid by the petitioner. 9. The learned counsel for the petitioner, in Writ Petition No.4497 of 2022, submitted that for tax year 2021 the petitioner had filed a tax return in relation to which an order under Section 122(5A) of the 2001 Ordinance was issued and an additional demand of approximately Rs.1 billion was generated against the petitioner. The said reassessment order was appealed before the Commissioner (Appeals), who annulled it by order dated 27.09.2022. He submitted that the Tax Department has not filed any appeal against the order of the Commissioner (Appeals), which is still in the field. He submitted that the advance tax is calculated on the basis of the assessed income of the taxpayer and the advance tax was consequently calculated in relation to tax year 2022 on the basis of additional demand generated by the Tax Department pursuant to its order under Section 122(5A) of the Income Tax Ordinance. And the petitioner was asked to deposit approximately an amount of Rs.312 million as advance tax. He further submitted that Section 147 notice was issued on 21.09.2022 and the additional demand generated pursuant to Section 122(5A) of the 2001 Ordinance order was annulled on 27.09.2022. The Tax Department however continued to insist on payment of the demand. He submitted that no advance tax was payable as the petitioner fell under Section 147(1)(d) of the 2001 Ordinance and its tax was deducted at source under Division III of the 2001 Ordinance and no advance tax had previously been paid by the petitioner either. He further submitted that Section 147 of the 2001 Ordinance, which creates a requirement to pay advance tax, does not provide that penal proceedings in relation to advance tax can be undertaken under Section 138 of the 2001 Ordinance or that accounts can be coercively attached in exercise of authority under Section 140 of the 2001 Ordinance. The only consequence that could flow, in the event that it was ultimately determined that the petitioner was liable to pay advance tax, would be that certain penalty for the short payment could be assessed and generated against the petitioner. He submitted that the entire sequences of events leading to coercive recovery were based on mala fide and devoid of legal authority. 10. The learned counsel for the petitioner, in Writ Petition No.4558 of 2022, reiterated that the Tax Department has no authority to seek recovery pursuant to Section 140 of the 2001 Ordinance in relation to advance tax where the petitioner had filed an estimate for purposes of Section 147(6) of the 2001 Ordinance, as for tax year 2021 there was no authority vested in the Tax Department to reject an estimate filed by the petitioner. While making such submissions, the learned counsel for the petitioner relied on Karachi Port Trust, Karachi v. Commissioner Inland Revenue, Karachi (2011 PTD 1996), Fauji Fertilizer Company Ltd. v. Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 3 others (2018 PTD 719) and Messrs Pakistan LNG Limited v. Federation of Pakistan, through Secretary Revenue Division, Ministry of Finance, Islamabad and 2 others (2022 PTD 1763). 11. Mr. Osama Shahid, Advocate, the learned counsel for the Tax Department, in Writ Petition No.181 of 2019, submitted that the Tax Department was under no obligation to issue notices under Sections 137 and 138 of the Income Tax Ordinance, where advance tax was liable to be paid under Section 147(1) of the 2001 Ordinance. He submitted that the time for payment of advance tax was prescribed under Section 147(5)(a) of the 2001 Ordinance and there was no need to issue any additional notice prior to affecting recoveries in exercise of authority under Section 140 of the Income Tax Ordinance. He submitted that once the date for payment of advance tax had passed, the Tax Department was under no obligation to notify the taxpayer re-satisfaction of the demand and it could simply recover the overdue liability in exercise of authority under Section 140 of the Income Tax Ordinance. 12. Mr. Ghulam Qasim Bhatti, Advocate, the learned counsel for the Tax Department, in Writ Petitions Nos. 4497 and 4558 of 2022, submitted that in the said cases, notices had been issued under Section 138 of the 2001 Ordinance prior to affecting coercive recovery under Section 140 of the Income Tax Ordinance. He submitted that a notice under Section 147 of the 2001 Ordinance to pay advance tax was similar to issuance of a notice under Section 137 of the 2001 Ordinance and there was thus no requirement to issue a repeat notice under Section 137. He submitted that to the extent that additional advance tax had been recovered from the taxpayers, the same could be refunded in accordance with Section 170 of the 2001 Ordinance that provided for refunds. Questions of legal interpretation 13. The questions that need to be considered for purposes of adjudication of the petitions include the following: 1. What is the nature of liability to pay advance tax under Section 147 of the 2001 Ordinance? 2. What are the consequences of a taxpayer defaulting on its obligation to pay advance tax and can advance tax be recovered coercively without the Tax Department issuing notices under Sections 137 and 138 of the 2001 Ordinance? 3. Does the taxpayer have a remedy of appeal where a notice for recovery of advance tax has been issued under Section 147 of the 2001 Ordinance? 14. Under the ordinary scheme of the 2001 Ordinance, the obligation to pay tax as assessed crystallizes at the end of the tax year and a tax year remains the unit of assessment for purposes of determining the liability of a taxpayer. Tax is defined under Section 2(63) of the 2001 Ordinance to mean "any tax imposed under chapter 2, and includes any penalty, fee or other charge or any sum or amount leviable or payable under this Ordinance." Section 4(1) of the Income Tax Ordinance, which is the primary charging Section in the 2001 Ordinance states that, "subject to this Ordinance, income tax shall be imposed for each tax year, at the rate or rates specified in Division I or II of Part-I of the First Schedule, as the case may be, on every person who has taxable income for the year." It is in view of Section 4(1) of the 2001 Ordinance (and the comparable provisions of the Income Tax Ordinance, 1979 and the Income Tax Act, 1922, being its predecessor tax laws), providing for imposition of tax on a yearly basis that each tax year has come to be recognized as a separate unit for the assessment of liability of a taxpayer. The definition of tax mentioned above, however, provides that any amount payable under this Ordinance is included within the definition of tax. Section 4(6) of the 2001 Ordinance provides that, "where, by virtue of any provision of this Ordinance, income tax is to be deducted at source or collected or paid in advance, it shall, as the case may be, be so deducted, collected or paid accordingly." Section 4(6) of the Income Tax Ordinance, which provides for payment of advance tax, when read with Section 4(1) of the 2001 Ordinance, places advance tax squarely within the definition of income tax payable at the time prescribed in Section 147 of the Income Tax Ordinance. While the overall liability of a taxpayer to pay income tax is to be determined by treating each tax year as a separate unit of assessment, by placing the obligation to pay advance tax as prescribed by provisions of the 2001 Ordinance within the charging section, it can hardly be argued that advance tax is a form of payment that does not fall within the domain of income tax properly so called. While there is dicta in case law that seeks to distinguish advance tax as a provisional payment from the liability to pay income tax, as will be discussed later in this judgment, it is the view of this Court, with respect, that the liability to pay advance tax is a liability created by the primary charging provisions of the 2001 Ordinance, and the machinery provision, including the provisions for affecting collection and making recoveries have also been made applicable in terms of Section 147(7) of the 2001 Ordinance for purposes of collecting advance tax. The only distinction between the liability to pay advance tax and the liability to pay income tax at the end of the tax year is that the former is not subject to assessment for purposes of calculating the quantum of advance tax payable, while the latter is subject to self-assessment (or reassessment) at the end of a tax year. Advance tax therefore properly falls within the definition of tax or income tax, the quantum of which is determined not on the basis of assessment at the end of the tax year but is computed on the basis of the statutory formulas provided in Sections 147(4) and (4B) of the 2001 Ordinance. And the payment of advance tax is a statutory obligation, which is to be discharged by the tax payer as a liability within the date prescribed in Section 147(5)/(5A)/(5B), failing which the Tax Department can resort to collection and recovery proceedings in terms of Sections 137, 138 and 140 read with Section 147(7) of the 2001 Ordinance, apart from imposing default surcharge for late payment in terms of Section 205 of the 2001 Ordinance. 15. Commenting on the provisions relating to advance tax in the Indian Income Tax Act, 1961 (Sections 207 and 211), and the relevant provisions of the Income Tax Act, 1922, it has been observed in Kanga and Palkhivala (The Law and Practice of Income Tax, 2020, LexisNexis, Volume-II at PP 3035), that, "under the basic scheme of this Act [the Income Tax Act, 1961], the subject of charge is the income of the previous year and not the income of the assessment year; in other words, the tax is assessed and paid in the next succeeding year up on the results of the year before. These sections mark a departure from the basic scheme. They rest on the principle of 'pay-as-you-earn', i.e. paying tax by installments in respect of the income of the very year in which the tax is paid." 16. The scheme for advance tax as applicable under the 2001 Ordinance is no different. It is based on the pay-as-you-earn principle. The obligation to pay rests largely on the income of the previous tax year as evident from the formulas provided under Section 147(4) and Section 147(4B) applicable to Companies/Association of Persons and individual taxpayers, respectively. The…

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