APPELLATE TRIBUNAL INLAND
REVENUE, DIVISION BENCH-I,
ISLAMABAD
ITA No.268/IB/2025
(Tax
Period 01.07.2024 to 31.12.2024)
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Mr. Mazhar Hussain; Nai Abadi School, Mohallah Mandi, Canal Road, Kahn
Chowk, Lillah Town. NTN: 3440217107255 |
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Appellant |
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Vs |
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Commissioner Inland Revenue, Withholding Zone, RTO,
Sargodha. |
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Respondent |
Appellant By: Mr. Farhan
Dawood, Advocate
Respondent BY: Mr. Naeem
Hassan, DR
Date of Hearing: 20.11.2025
Date of Order: 20.11.2025
ORDER
M. M. AKRAM (Judicial Member): The
present appeal has been filed by the appellant as a first appeal under Section
131 of the Income Tax Ordinance, 2001 (“the Ordinance”), challenging the
impugned order dated April 16, 2025, passed by the Deputy Commissioner Inland
Revenue (DCIR), Mandi Bahauddin Zone, RTO Sargodha, under Sections 161
and 205 of the Ordinance for the tax period from July 1, 2024 to December 31,
2024, relevant to the tax year 2025. The appeal has been preferred on the
grounds set forth in the memo of appeal.
2. The brief background of the matter is that
proceedings were initiated on the basis of information indicating that the
appellant-taxpayer had made sales to retailers and wholesalers during the tax
period from July 1, 2024, to December 31, 2024. Being a
prescribed person, the taxpayer was legally obliged to collect and deposit tax
under Section 236H of the Ordinance at the time of sale to retailers, and in
the case of any sale by a distributor or dealer to another wholesaler, at the
rate prescribed in Division XV of Part-IV of the First Schedule to the
Ordinance. The taxpayer failed to discharge this statutory obligation. Accordingly,
a show cause notice under Section 161 of the Ordinance was issued on March 12,
2025, requiring compliance by March 18, 2025; however, no compliance was made.
A reminder notice was thereafter issued requiring compliance by April 15, 2025,
but the appellant neither filed a written response nor sought an adjournment.
Consequently, the assessing officer proceeded ex parte and passed the impugned
order under Sections 161 and 205, creating a tax liability of Rs. 27,113,823
and a default surcharge of Rs. 3,253,658/- aggregating to a total demand of Rs.
30,367,481. Aggrieved, the appellant has assailed the impugned order before
this Tribunal, raising various grounds.
3. The case was fixed for hearing on November
20, 2025. The learned Authorised Representative (AR) for the appellant
reiterated the arguments advanced in the grounds of appeal, whereas the learned
Departmental Representative (DR) supported the impugned order.
4. We have carefully considered the rival
submissions, examined the scheme of the Income Tax Ordinance, 2001, and perused
the relevant statutory provisions, including Sections 161, 165, 168 and 169 of
the Ordinance as well as Rule 44(4) of the Income Tax Rules, 2002. The decisive
question requiring determination by this tribunal is:
Whether
proceedings under Section 161 may be initiated and concluded for a portion
of a tax year, or whether such proceedings must necessarily relate to the entire
relevant tax year for which withholding statements and the return of income are
statutorily filed?
In order to appreciate the question,
it is necessary to examine the statutory architecture governing withholding
obligations and their enforcement. Under Section 161(1) of the Ordinance, a
person may be held personally liable for failure to collect or deduct tax.
However, this liability is not standalone or abstract; rather, it is
inextricably linked to, and measured against, the transactions and withholding
obligations that are reflected in the withholding statements filed under
Section 165 of the Ordinance. These statements, prepared on a quarterly basis, are
statutory documents forming the very foundation for determining compliance.
Rule 44(4) of the Income Tax Rules, 2002 then mandates a mandatory obligation
upon the Commissioner to conduct a record-based reconciliation of:
i.
payments made by the
taxpayer;
ii.
tax deducted or collected;
iii.
withholding statements filed
under section 165; and
iv.
the payee’s tax declarations
and return of income.
5. It is an established principle that without the filing of section 165 statements
and without the availability of the payee’s tax details,
the reconciliation envisaged under Rule 44(4), ibid, cannot be carried out. The
rule is mandatory in nature, and an order under section 161 cannot be passed in
the absence of such reconciliation. Reliance may be placed on the judgments
titled CIR vs. Islam Steel Mills, (2015
PTD 2335) and M/s Nishat (Chunian) vs. Federal Board
of Revenue,
(2015 PTD 1385). Thus, it follows necessarily that
reconciliation presupposes the existence of both sets of statutory filings, the
quarterly withholding statements for the entire tax year and the return
of income for that same year. Absent these, reconciliation becomes impossible,
and the statutory machinery under Rule 44(4) cannot be meaningfully invoked. A
partial period, in respect of which no complete withholding cycle or return
exists, would not permit the Commissioner to compare or verify the taxpayer’s
compliance as contemplated by the Ordinance. The legislative intent behind Rule
44(4) is to ensure accuracy of year-wide reporting, not isolated or fragmented
segments thereof. We have further observed that the assessing officer has not
strictly adhered to the instructions issued by the Federal Board of Revenue
vide C.No.3(08)SS(A&A)/2023 dated February 19, 2025, which were issued in pursuance
of the tribunal’s order in the case titled M/s Wise Communication Systems (Pvt) Limited Vs Deputy
Commissioner Inland Revenue, Zone-IV, Range-II, LTO, Islamabad (ITA No.1889/IB/2024 order dated
29.01.2025).
6. Further, Section 161(1B) provides that
where, at the time of recovery, it is established that the tax “has
meanwhile been paid by the person” from whom it was required to be
collected, no recovery shall be made from the withholding agent except for a default
surcharge. This safeguard can only be applied after the full-year position of
the recipient’s tax payments becomes ascertainable, which again reinforces that
the Commissioner must proceed with reference to the entire tax year, and not
isolated months. This provision creates a mandatory statutory bar
against recovery of tax from the withholding agent if the payee has already
paid such tax through their return, advance tax, or any other mode. Reliance is
placed on the judgment of the Hon’ble
Lahore High Court in M/s Riaz Bottlers (Pvt.) Ltd. v. LESCO and others
(2010 PTD 1295), wherein it was observed that where the deductee or payee has
already discharged the corresponding tax liability, the department is not
entitled to recover the same tax from the deductor who failed to deduct it,
except to the extent of default surcharge under Section 161(1B) of the
Ordinance. A similar view was reiterated by the Hon’ble Lahore High Court in Sui
Northern Gas Pipelines Ltd. v. Deputy Commissioner Inland Revenue and others,
(2014 PTD 1939), wherein it was held that:
“If it is established that the tax
that was to be deducted from the payment to the payee/deductee has, in the
meantime, been paid by that person (payee/deductee), no recovery shall be made
from the deductor who failed to deduct the tax. The deductor shall, however, be
liable to pay default surcharge at the rate of 18% per annum from the date he
failed to collect or deduct the tax to the date the tax was paid.”
Thus, the ability to determine
whether the recipient has paid tax is inherently tied to the assessment cycle
of the relevant year. A piecemeal proceeding, before the tax year has closed or
before relevant statements/returns have been filed, would defeat this statutory
protection under Section 161(1B), thereby exposing the withholding agent to
recovery even where the underlying tax may ultimately stand paid by the
recipient. Therefore, unless the payee’s tax payments are
first established through record-based verification, no recovery can legally be made
from the taxpayer under section 161.
7. Therefore,
in the context of the statutory scheme, it becomes evident that proceedings
under Section 161 are not designed to be initiated or concluded on a piecemeal
or partial-year basis. The Commissioner must assess the taxpayer’s withholding
compliance for the whole tax year, reflected through the biannual
statements under Section 165 and reconciled with the return of income under
Rule 44(4). Only then can the Commissioner ascertain the correct quantum of
default, reconcile it with the taxpayer’s declared position, and adjudicate
whether the bar under Section 161(1B) applies. A fragmented or partial-year
proceeding would not only undermine the statutory reconciliation mechanism but
would also risk erroneous recovery in violation of Section 161(1B).
8. In
view of the scheme of the Ordinance, the structure of the withholding regime,
the mandatory reconciliation requirement under Rule 44(4), and the statutory
safeguard under Section 161(1B), proceedings under Section 161 cannot lawfully
be initiated, conducted, or concluded on a piecemeal basis for a fraction of a
tax year. Such proceedings must necessarily relate to, and encompass, the
entire relevant tax year so that reconciliation of withholding statements with
the return of income is possible, and so that the Commissioner may correctly
ascertain whether the underlying tax has already been paid by the recipient.
Any piecemeal initiation of proceedings would be inconsistent with the
statutory framework, procedurally defective, and liable to be set aside.
Accordingly, the appeal of the appellant is accepted and the impugned order is
annulled. However, it is made clear that the department
is at liberty to reinitiate proceedings only upon availability of the complete
record required under Rule 44(4) and subject to verification under section
161(1B) of the Ordinance.
9. Let a copy of this order be forwarded to
the learned Member (Operations) and Member (Legal), Federal Board of Revenue,
for issuance of appropriate instructions to all assessing officers to ensure
strict compliance with the above-noted legal provisions, procedural
requirements, and their mandatory nature, so as to prevent unnecessary
litigation and to conserve the valuable time of the Tribunal.
Sd/- (SHARIF
UD DIN KHILJI) MEMBER |
Sd/- (M. M.
AKRAM) JUDICIAL
MEMBER |
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