Legal Principle & Question Decided

Ruling Summary: This decision was rendered by the Islamabad High Court on 2024-12-18, officially reported as 2024 IHC 280. In this matter between M/s Pakistan Telecommunication Authority through its Director (Budget & Accounts) and others and Federation of Pakistan for the purpose of Service through Chairman Federal Board of Revenue, Islamabad & others, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.

Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.

Full Judgment Text & Judicial Ruling

Court Name: Islamabad High Court Judge(s): Babar Sattar Title:M/s Pakistan Telecommunication Authority through its Director (Budget &

Accounts) and others vs Federation of Pakistan for the purpose of Service through Chairman Federal Board of Revenue, Islamabad & others Case No.:Writ Petition No. 181/2019, Writ Petition No. 4497/2022, Writ Petition No. 4558/2022 Date of Judgment:2024-12-18 Reported As: 2024 IHC 280, PTCL 2025 CL. 99 Result: Petition Allowed Judgment

JUDGEMENT 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

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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 assessm ent order and Commissioner Inland Revenue (Appeals) annulled the assessm ent 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 assessm ent 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 counsels 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

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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 malafide 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 vs. Commissioner Inland Revenue, Karachi (2011 PTD 1996), Fauji Fertilizer Company Ltd. vs. Federation of Pakistan through Secretary, Ministry of Finance, Islamabad and 3 others (2018 PTD 719) and Messrs Pakistan LNG Limited vs. 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 Sections 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 No.4497 and 4558 of 2022, submitted that in the said cases, notices had been issued under Section

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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 assessm ent 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- assessm ent (or reassessm ent) 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

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assessm ent 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 scheme that can be gleaned from Section 147 of the 2001 Ordinance is rooted in the assumption that the income of a taxpayer in the current year for which advance tax is due under Section 147 of the 2001 Ordinance is no less than the income of the taxpayer in the previous tax year. As the quantum of advance tax payable determined in accordance with the formulas in Sections 147(4) and 147(4B) are based on an assumption and not on actual assessment, the amount of advance tax paid may be in excess of the actual amount of income tax payable for the tax year divided over the four quarters, which is then determined at the end of the tax year when an income tax return is filed by the taxpayer. But as the obligation to pay advance tax springs from estimated income for a quarter, any advance tax paid becomes a tax credit for the benefit of the tax payer to be adjusted against the tax liability due for the tax year as determined after assessment and any excess advance tax paid over and above such liability is to be refunded to the taxpayer at the end of the tax year once the tax liability for such tax year has been assessed and has crystallized. It is this excess amount paid as advance tax that is to be refunded after assessment of income at the end of the tax year that becomes a credit in the hands of the State held on behalf of the taxpayer, and not the entire amount of advance tax payable in each quarter on the basis of pay-as-you-earn principle employed to compute the amounts payable under Sections 147(4) and (4B) of the 2001 Ordinance. 17. The self-assessm ent regime that forms the basis of assessment under Section 120 of the 2001 Ordinance has also been incorporated into the advance tax regime with a tweak. Section 147(4A) of the 2001 Ordinance obliges all Companies and Association of Persons to form an estimate of the tax payable for the relevant year before 25th December of each tax year (i.e. prior to the end of the second quarter). In the event that such estimate reflects that the tax payable for the quarter is more than that calculated in accordance with the formula under Section 147(4) of the Income Tax Ordinance, the taxpayer is required to pay the additional tax, based on the estimate, in the two succeeding quarters. This takes care of a situation where the advance tax payable during a certain tax year is greater than the advance tax liability computed in accordance with the formula in Section 147(4) of the 2001 Ordinance. Section 147(6) of the 2001 Ordinance then deals with the opposite scenario where a taxpayer forms an estimate that the advance tax liability computed in

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accordance with the formulas in Sections 147(4) or (4B) of the 2001 Ordinance, as the case may be, is in excess of the tax payable for the current tax year. While Section 147(4A) of the 2001 Ordinance creates an obligation for Companies and Associations of Persons to form an estimate, Section 147(6) of the 2001 Ordinance creates an option for the taxpayer to file an estimate with the Commissioner where the tax due for the current tax year in the taxpayer's estimate is less than the tax liability assessed for the previous tax year, to enable the taxpayer to adjust advance tax installments accordingly. The proviso to Section 147(6) of the 2001 Ordinance then prescribes the details to be included alongwith the estimate to be furnished to the Commissioner in the event that the estimate is being filed to advise the Commissioner that the liability to pay advance tax stands reduced by virtue of such estimate. 18. Through Finance Act, 2018, a second proviso was added to Section 147 of the Income Tax Ordinance, which provided that, "where the Commissioner is not satisfied with the documentary evidence provided or where an estimate of the amount of tax payable is not accompanied by details mentioned in the first proviso, the Commissioner may reject the estimate after providing an opportunity of being heard to the taxpayer and the taxpayer shall pay advance tax according to the formula contained in sub-Section (4)." By virtue of this proviso, power was vested in the Commissioner to reject an estimate furnished by the taxpayer to claim that its advance tax liability was lesser than that calculated in accordance with the formula provided in Section 147(4) of the Income Tax Ordinance, requiring the taxpayer to continue to discharge advance tax payment liability in accordance with calculations made pursuant to the formula in Section 147(4) of the Income Tax Ordinance. The proviso becomes relevant in view of the case law that will be discussed later in the judgment, wherein it has been observed that the Tax Department is vested with no authority to reject an estimate filed under Section 147(6) of the 2001 Ordinance. And the consequence of filing an inaccurate estimate and discharging advance tax payment liability accordingly is that where at the end of the tax year after such estimate is found to be incorrect upon assessm ent of liability for the tax year, the Tax Department can impose default surcharge at the rate of 12 percent of the unpaid liability in exercise of authority under Section 205(1A) of the 2001 Ordinance. 19. The legislature, it appears, has been unable to make up its mind about conferring power on the Commissioner to reject an estimate filed in terms of Section 147(6) of the 2001 Ordinance. The second proviso to Section 147(6) of the 2001 Ordinance was omitted by the Finance Act, 2021, taking away the Commissioner's power to reject an estimate. The second proviso has, however, been re- enacted through the Finance Act, 2024, which again confers on the Commissioner the power to reject an estimate, after providing the taxpayer an opportunity to be heard, and to require the taxpayer to pay advance tax in accordance with liability calculated according to the formula in Section 147(4) or 147(4B) of the 2001 Ordinance, as the case may be. For our present purposes, the second proviso to Section 147(6) of the 2001 Ordinance was in field in tax year 2018 and only needs to be considered for purposes of Writ Petition No.181 of 2019. It is however not relevant in view of the facts of the case, as the petitioner filed no estimate in terms of Section 147(6) of the 2001 Ordinance claiming reduced liability to pay advance tax. The controversy in the said petition revolves around lack of due process and coercive recovery without issuance of notices under Section 137 or 138 of the 2001 Ordinance. 20. The relevant tax year for purposes of Writ Petitions No.4497 and 4558 of 2022 is 2023. As the second proviso to Section 147(6) stood omitted by the Finance Act, 2021, the Commissioner in the said year was vested with no authority to reject an estimate. This is relevant for purposes of Writ Petition No.4558 of 2022 where an estimate was filed by the taxpayer. With this enumeration of the scheme of Section 147 of the Income Tax Ordinance, we can now consider the questions framed in Para-13 above.

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The nature of liability to pay advance tax under Section 147 of the Income Tax Ordinance 21. The liability to pay advance tax is an exception to the rule that the liability to pay income tax as imposed under Section 4(1) of the 2001 Ordinance is assessed at the end of the tax year, which liability is to be discharged after the filing of a return under Section 114 of the 2001 Ordinance that is treated as an assessm ent under Section 120 of the 2001 Ordinance. In view of Section 4(1) of the 2001 Ordinance, it is now settled that for purposes of income tax each tax year is a separate unit of assessm ent. The liability to pay income tax for a certain tax period (i.e. tax year) crystallizes once assessm ent has been undertaken and the tax liability is determined on the basis of such assessm ent (which is subject to reassessment under Section 122; but this detail doesn t affect our analysis as a conceptual matter as the tax return is deemed an assessment). The deduction of tax at source or the…

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