The Federal Tax Ombudsman (FTO) has held that obtaining tax deposits from taxpayers during proceedings under Section 175C of the Income Tax Ordinance, 2001, without subsequently determining liability through the prescribed legal process, constitutes maladministration and violates the principles of due process and fair administration.
The FTO directed the Federal Board of Revenue (FBR) to submit a compliance report within 45 days, a news release said on Tuesday. The FTO ruling was issued in response to a complaint filed by the owner of Noor Surgical Hospital, Abbottabad, alleging that Inland Revenue officials had visited the hospital and initiated proceedings under Section 175C of the Income Tax Ordinance, 2001.
The complainant maintained that a substantial amount was recovered under coercive circumstances without any lawful assessment, adjudication or determination of tax liability.
In its response, the FBR stated that the proceedings were initiated lawfully and that the taxpayer voluntarily deposited the amount during monitoring and inquiry proceedings. The department denied allegations of coercion or maladministration and asserted that the payment was made of the taxpayer’s own accord.
During proceedings before the FTO, both sides were given an opportunity to present their positions. The department relied on documentary evidence to support its claim that the payment was voluntary.
However, no speaking order, assessment order or other legal determination establishing the alleged default or tax liability was produced before the forum.
After examining the record, the Ombudsman observed that Section 175C is primarily an investigative provision empowering Inland Revenue authorities to conduct inquiries, obtain information and monitor business activities for tax purposes. It does not authorize the recovery or collection of taxes without determination of liability through the statutory assessment mechanism.
The FTO noted that after obtaining the deposit, the department discontinued the proceedings and failed to pursue them to their logical conclusion.
The absence of any speaking order explaining the basis of liability, the nature of the alleged default or the outcome of the proceedings rendered the department’s conduct legally unsustainable. The Ombudsman further observed that the practice of obtaining so-called “voluntary deposits” during inquiry proceedings raises serious concerns regarding transparency, fairness and the unequal bargaining position between taxpayers and revenue authorities. Such deposits, it said, cannot substitute the legal process required for the determination and recovery of tax.
The FTO concluded that Section 175C does not grant unfettered authority to collect revenue outside the statutory framework, and that any deposit obtained without a subsequent legal determination may constitute unauthorised recovery.
The failure to issue a speaking order after obtaining a monetary deposit was held to be inconsistent with the principles of due process and fair administration. Consequently, the department’s actions were found to fall within the definition of maladministration under the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.
Accepting the complaint, the FTO recommended that the FBR conduct a fact-finding inquiry into the circumstances under which the amount was obtained, fix responsibility where officials are found to have acted beyond lawful authority, and ensure that no coercive or retaliatory action is taken against the complainant except in accordance with law.
The Ombudsman also recommended issuing administrative guidelines for the acceptance of “voluntary deposits” during inquiry and monitoring proceedings to ensure transparency and compliance with the statutory framework.