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 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 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 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 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 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.
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 obligation to pay advance tax is an exception to the rule that income tax liability accrues and becomes payable upon assessment at the end of the tax year.
22. By virtue of Section 4(6) of the Income Tax Ordinance, a charge is created on the income of a taxpayer to the extent that the taxpayer is liable to pay income tax in advance or such tax is to be deducted at source. Section 4 of the 2001 Ordinance is the primary charging Section in the 2001 Ordinance and in terms of Section 4(6) of the 2001 Ordinance, read with Section 147, it creates a charge on the income of taxpayers to pay income tax in advance where provisions of the 2001 Ordinance provide so. This also becomes evident from the definition of tax under Section 2(63) of the Income Tax Ordinance, which includes within such definition any tax imposed under Chapter-II (including by virtue of Section 4 of the Income Tax Ordinance) and also includes "any sum or amount leviable or payable under this Ordinance". Advance tax falls within the definition of tax as it refers an amount levied by virtue of Section 4(6) read together with Section 147 of the 2001 Ordinance and is payable at the time prescribed in Section 147(5), (5A) and (5B) read together with Section 147(6) of the Income Tax Ordinance. Thus, in terms of Sections 2(63), 4 and 147 of the 2001 Ordinance, a charge has been created on the income of a taxpayer to pay advance tax on the basis of pay-as-you-earn principle within each quarter. Sections 147(4) and (4B) include formulas on the basis of which the liability to pay advance tax is to be computed. Section 147(5), (5A) and (5B) of the 2001 Ordinance prescribe the relevant dates on which the advance tax is payable by individual taxpayer and Companies/Association of Persons etc. Section 147(7) of the 2001 Ordinance then provides that, "the provisions of this Ordinance shall apply to any advance tax due under this Section as if the amount due were tax due under an assessment order." Through Section 147(7) the Legislature has afforded the Tax Department the machinery to affect recovery of advance tax liability as computed under Sections 147(4) and (4B). The language of Section 147(7) of the 2001 Ordinance deems that the advance tax so computed is to be treated as income tax due under an assessm ent order. The deeming provision under Section 147(7) underlines that the liability to pay advance tax as computed under Sections 147(4) and 147(4B) is not the product of an assessm ent order, and that for purposes of advance tax computation the assessment stage of liability determination has been skipped altogether. This however does not mean that a charge on the income of a taxpayer has not been created or that the taxpayer's liability to pay advance tax as calculated in accordance with Section 147(4) and (4B) does not accrue at the time prescribed in section 147 or that such liability cannot be recovered in terms of Section 147(7) of the 2001 Ordinance read with the recovery provisions in the 2001 Ordinance.
23. Thus, the legislature has not just created a charge and prescribed formulas to compute the quantum of liability to be discharged at specified times, but it has also equipped the Tax Department with collection and recovery tools, while providing that failure to discharge advance tax liability shall also attract default penalty on the underpaid amount. This is why the scheme of advance tax, sans actual assessm ent, remains an exception to the regular scheme of generation of income tax liability which crystallizes at the end of the tax year once tax assessment has taken place and the amount of income tax due has been calculated while treating the tax year as a unit of assessm ent. Sections 147(1) and 147(2) of the 2001 Ordinance list the taxpayers who do not fall within the scope of advance tax payable by taxpayer and remain subject to the ordinary income tax regime where the liability to pay tax either becomes due at the end of the tax year upon assessm ent or otherwise stands discharged by virtue of deduction of advance tax at source.
24. There is some confusion with regard to the nature of liability to pay advance tax due to dicta in relevant judgments that need consideration. It was held by the Supreme Court in Commissioner of Income Tax vs. M/s Habib Sugar Mills Ltd. (1993 PTD 343), in relation to the nature of advance tax, that, "the said amount does not become the property of the Central Government but remains vested in the assessee company. Undoubtedly, it is an amount which must be paid in advance, in respect of tax, before it becomes due. But it (the tax) becomes due only after regular assessment and if on regular assessment nothing or a lesser amount is found due and payable; the Government, in that event, shall have to return the amount paid or the sum paid in excess with interest from the date of payment to the date of such assessment." In the said matter, the Supreme Court was enumerating provisions of the Income Tax Ordinance, 1979.
25. The question of nature of advance tax came before the Lahore High Court in Sui Northern Gas Pipelines Limited vs. Federation of Pakistan and others (2017 PTD 1774) in which while relying on the aforementioned dicta from Habib Sugar Mills Ltd., it was observed that advance tax, "is merely an amount which is paid in advance in respect of tax before it becomes due. Quite evidently, the tax becomes due only after regular assessment and in case the amount is found to have been paid more than what was due, a refund is in order to the assessee. By this token, therefore, advance tax is an estimated amount of income tax to be paid by the taxpayer in four quarterly installments. The concept underlying the entire regime of advance tax is that estimate is to be made by the taxpayer and it is not for the tax authorities to question or object till the close of the tax year and it is then that the law empowers the Taxation Officers to verify the advance tax paid and to impose any liability in case it is found that an additional tax is due from the taxpayer." It was similarly observed in Haidar Industries through Managing Partner and others vs. Federation of Pakistan through Secretary (2016 PTD 2004) that, "advance tax is a payment made merely on account to be adjusted against the charge of income tax as finally ascertained. It is not a tax but merely a provisional payment of an amount towards tax due."
26. While relying on the law laid down by the Supreme Court in Elahi Cotton Mills Limited Vs. Federation of Pakistan (PLD 1997 SC 582) as well as other judgments, including, inter alia, Whitney vs. Inland Revenue Commissioners (AIR 1926 AC 37) it was held by the Lahore High Court in National Power Parks Management Company (Pvt.) Ltd. vs. FBR and others (2020 PTD 1001) that, "the recovery of tax whether directly from the assessee or indirectly through collection from expenditure or deduction from receipts, as the case may be, does not amount to assessment of tax, nor creates any liability to pay the said amount. Advance tax is merely a provisional payment."
27. While this Court agrees with the ratio in the judgments of the Lahore High Court in Sui Northern Gas Pipelines Limited as well as National Power Parks Management (Pvt.) Ltd. and relies on the latter in relation to the other questions discussed later in the judgment, with due respect (especially as the aforementioned judgments are authored by the most erudite Judges), its reading of the 2001 Ordinance does not lead to the conclusion that (i) the obligation to pay advance tax does not become due till after regular assessment at the end of the tax year, and (ii) the advance tax payment due as computed in accordance with the formulas in Sections 147(4) and (4B), which is determined without assessment of tax, creates no liability to pay the said amount at the time prescribed in Section 147(5)/(5A)/(5B). It is correct that advance tax payment remains a provisional income tax payment, which is true for any payment in lieu of income tax that is adjustable at the end of the year once the total liability for the tax year is finally ascertained. This, however, doesn't change the fact that advance tax as a statutorily defined liability falls within the definition of tax, the payment of which is not optional but mandatory, and failure to do so attracts penal consequences. It does generate a tax credit in favor of the taxpayer to be adjusted against total income tax liability at the end of the year, but once the payment is made it vests in the exchequer, and the taxpayer can only claim title over such advance tax amount as is in excess of the taxpayer's total tax liability for the year and becomes refundable in terms of section 147(10). It is a settled principle of tax law that nothing is to be read in or out of a taxing statute (see for example Nadeem Ahmed Advocate Vs. Federation of Pakistan (2013 SCMR 1062), The Collector of Sales Tax Vs. M/s Super Asia Muhammad Din & Sons (2017 PTD 1756), and Gul Taiz Khan Marwat Vs. Registrar, Peshawar High Court (PLD 2021 SC 391)). Notwithstanding the suggestion in judgments, as discussed here, that advance tax is not a tax or that it does not create a liability, this court has been unable to read provisions of the 2001 Ordinance to support such interpretation.
28. At the cost of repetition, Section 4 of the 2001 Ordinance clearly and unambiguously creates a charge on the income of a taxpayer to discharge advance tax liability. Advance tax being an impost in view of Section 4(6) read together with Section 147 of the Income Tax Ordinance, squarely falls within the definition of tax under Section 2(63) of the Income Tax Ordinance. Section 147(7) of the 2001 Ordinance then empowers the Tax Department to use the collection machinery for purposes of collecting the advance tax computed as payable in accordance with Sections 147(4) and (4B) of the Income Tax Ordinance, subject to the filing of any estimate by the taxpayer under the proviso to Section 147(6) of the Income Tax Ordinance. This reflects that the payment of advance tax is not optional but is a liability to be discharged by the taxpayer unless of course the taxpayer falls within the carve-outs provided under Section 147(1) and (2). Merely because the liability accrues without assessm ent of income tax does not make the payment of advance tax optional or excludes advance tax from the definition of tax for purposes of Section 2(63) of the 2001 Ordinance. The fact that the liability in relation to advance tax accrues and becomes payable without assessm ent is then catered for in subsections (8), (9) and (10) of Section 147. The advance tax paid in each quarter is treated as a tax credit that is set off against the total income tax liability for the tax year as determined once an assessment has taken place after the expiry of the tax year and the total tax liability for such tax period crystallizes. Advance tax, therefore, is only a provisional payment to the extent that the tax liability of the taxpayer for the relevant tax year remains to be assessed and the sum paid in the form of advance tax remains adjustable in terms of the tax liability as assessed.
29. The advance tax payment remains vested in the taxpayer, as held in Habib Sugar Mills Ltd. while interpreting provisions of the Income Tax Act 1922, only in a sense that it results in the generation of a tax credit, which is then adjusted against the tax liability of the taxpayer as determined after assessm ent at the end of the tax year. It is not the entire amount of the advance tax that remains the property of the taxpayer up until the end of the tax year, but only such amount of the advance tax that is not adjustable against the tax liability as determined after assessment at the end of the tax year, and becomes excess payment liable to be refunded to the taxpayer in terms of Section 147(10) read with Sections 170 and 171 of the Income Tax Ordinance. In other words, the advance tax payable by a taxpayer is in relation to income that is assumed by law to have accrued to the taxpayer within the quarter for which advance tax payment is due and not in relation to income that has not yet been generated. As the advance tax liability is an assumed liability based on the income assessed for the previous tax year, there is the possibility that the income generated for the current tax year during which advance tax payments are to be made is lesser or greater than that of the previous year. To cater to this possibility, Sections 147(4A) and 147(6) of the 2001 Ordinance create a mechanism for the taxpayer to file estimates to adjust the advance tax liability upward or downward in view of the revenue and income of the taxpayer for the relevant quarters in the tax year for which advance tax payment is due (the ability of the Tax Department to reject such estimate will be dealt with under question No.2 later in this judgment).
30. No reading of the 2001 Ordinance leads one to the conclusion that the advance tax paid by a taxpayer is a form of credit or loan, as understood in ordinary financial sense, afforded by the taxpayer to the State to cater for state expenditure. The pay-as-you-earn principle underlines the assumption that the taxpayer is paying advance tax against income that has been earned but has not yet been definitively assessed. The 2001 Ordinance does not provide that the state will pay taxpayers interest for using the amounts paid by taxpayers in the form of advance tax, which would have been expected had the amounts paid as advance tax remained the property of the taxpayer, as was provided under the Income Tax Act 1922 or just as advances made by depositors to a bank remain the property of such depositors and earn interest. The fact that advance tax creates credit in favor of the taxpayer only emphasizes the fact that no assessment has taken place as yet and upon assessm ent the overall tax liability for the tax year may change (see for example Commissioner of Income Tax v. Khalid Textile Mills (2017 SCMR 813) wherein the Supreme Court enumerated the definition and concept of tax credit. It noted that tax credit was not defined in the 2001 Ordinance and quoted with approval dictionary definitions, including, inter alia, that "tax credit is a legal provision permitting taxpayers to deduct specified sums from their tax liability" and held that "tax credit is an amount which is directly offset against or adjusted/deducted from the tax liability and not the gross income"). In this sense, what remains the property of the taxpayer is a sum in excess of what has been paid as advance tax after adjustment against what is determined to be due for the tax year upon assessment of the taxpayer's income at the end of the tax year. It is this excess amount which is liable to be refunded by the State in terms of Section 147(10) of the 2001 Ordinance and against which the State is liable to pay interest in terms of Section 171 of the 2001 Ordinance to the extent that it delays the payment of refund beyond the period prescribed in Section 171 of the 2001 Ordinance. And such refund becomes due only after assessm ent has taken place and advance tax after adjustment against total income tax liability for the year creates a surplus.
31. It needs to be appreciated that the advance tax regime as incorporated under provisions of the Income Tax Act 1922 was significantly different from the form it has acquired today under the 2001 Ordinance. Section 18A(1) of the Income Tax Act 1922 provided that an income tax officer could by notice "require an assessee to pay quarterly to the credit of the Central Government" on quarterly basis one-quarter of the income tax or super tax as assessed during the previous year. Section 18A(5) then required the Central Government to pay simple interest (2% before 01.04.1955 and 4% thereafter) from the date of payment to the date of assessment. It was due to the language of Section 18A and the scheme that it incorporated, where the Central Government was paying interest over the credit advanced to it by the taxpayer for the period when credit was afforded and when assessm ent was made, that led to the conclusion that the title of such property remained vested in the taxpayer. It was in this context that the Supreme Court held in Habib Sugar Mills Ltd. that: "A careful reading of the above provision [Section 18A] indicates that the amount which is paid quarterly to the credit of the Central Government by the assessee has not been described in the text of the provision, as advance payment of tax (although these words appear in the marginal note of section 18A) but are called payments made to the credit of the Central Government. Under the provisions of the Act, tax is charged in pursuance of the provisions of section 3 thereof. Herein rates at which income tax is to be charged is provided. There is no direct nexus between the payment made under section 18-A and the payment which is made under section 3. The nature of the payment made under section 18-A becomes clearer when, in addition to the provision of subsection (1) of section 18A (providing for quarterly payments) the provisions of subsections (5) and (5A) are considered. These provisions show that the payment being made under section 18-A is a payment made merely on account, to be adjusted against the charge of income tax as finally ascertained and determined on completion of the regular assessment by the I.T.O for the relevant assessment year. This is manifest from the circumstance that simple interest at the rate of 4% per annum is to be paid by the Central Government on the amount paid under section 18-A from the date of the payment to 30th June of the financial year in which the amount was paid...The said amount does not become the property of the Central Government but remains vested in the assessee company. Undoubtedly, it is an amount, which must be paid in advance, in respect of tax, before it becomes due. But it (the tax) becomes due only after regular assessment and if on regular assessment nothing or a lesser amount is found due and payable; the Government, in that event, shall have to return the amount paid or the sum paid in excess with interest from the date of payment to the date of such assessment. Accordingly, in our opinion the amount paid under section 18-A is not a payment of the "income tax" in advance but merely the credit of an amount with the Central Government, which can be utilized and adjusted to the extent necessary towards the ultimate liability of income tax found due after it has been determined."
While considering the scheme of advance tax under the Income Tax Ordinance 1979 and the inability of the Tax Department to affect recovery in lieu thereof, the Supreme Court held in Chairman Central Board of Revenue v. Messrs. Pak-Saudi Fertilizer Ltd. (2001 SCMR 777) that the assessing officer "not being authorized by law cannot effect recovery of advance tax in case of failure to pay the same on time under section 53". The Lahore High Court relied on this ruling and held in Commissioner of Income Tax Vs. Sethi Flour Mills (2015 PTD 394) that while no order could be passed by the assessing officer to recover advance tax under section 53 of the Income Tax Ordinance 1979, "since payment of advance tax is a statutory obligation, therefore, on default it entails payment of additional tax, for the defaulted period."
32. The advance tax scheme as has evolved and exists today under the 2001 Ordinance is altogether different. Unlike the scheme of the Income Tax Act 1922, Sections 4 and 147, as charging sections, create a nexus between income tax and advance tax. Section 147 no longer provides that advance tax payment is to be made in the form of a credit to the Federal Government, deriving benefit from which the Federal Government shall pay interest on the use of such funds from the date of payment to the date of its adjustment against income tax liability for the tax year, as was required under Section 18A(5) of the Income Tax Act 1922. Section 147 of the 2001 Ordinance declares advance tax to be a liability to be discharged at the time prescribed therein. It provides a statutory formula for computation of advance tax liability. It prescribes penal consequences for not discharging advance tax liability by making a default surcharge applicable in case of nonpayment or short-payment. It also empowers the Tax Department to use the machinery provisions of the 2001 Ordinance to collect and recover the advance tax payable as if it were assessed income tax.
33. It is for the aforementioned reasons that it is only such payment made by a taxpayer in the form of advance tax that is subsequently found to be in excess of the taxpayer's liability to pay tax as assessed at the end of the tax year that remains the property of the taxpayer and is liable to be refunded by the State. This Court therefore finds that advance tax is income tax, properly so-called, and is liable to be paid as and when it becomes due in terms of Section 147(5), (5A) and (5B) of the Income Tax Ordinance. In order to affect recovery of such tax liability, the Tax Department is at liberty to employ, in terms of Section 147(7), the collection and recovery provisions of the 2001 Ordinance.
Consequences of a taxpayer defaulting re paym ent of advance tax
34. This question has been considered by High Courts in relation to the Income Tax Ordinance 1979, as well as the 2001 Ordinance for purposes of tax years where the second proviso to Section 147(6) of the 2001 Ordinance authorizing the Commissioner to reject an estimate filed by the taxpayer was not a part of the tax code. Enumerating the history of advance tax, it was held by the Sindh High Court in Pak-Saudi Fertilizers Limited vs. Federation of Pakistan and others (1999 PTD Karachi 4061) that, "an assessee is to pay advance income tax in a particular assessment year, based upon the last assessed income. This advance tax is then adjusted with the actual income tax liability which is found at the time of the regular assessment of that particular assessment year...
The lawmakers in their wisdom have provided for imposition of additional tax for failure to pay advance tax under Section 87 of the 1979 Ordinance. Although, there is the provision to charge additional tax for such default, the 1979 Ordinance does not confer any power upon the Assessing Officer to seek recovery of the defaulted amount falling under Section 53. Such was also the position under the erstwhile Section 18A of the Income Tax Act, 1922, the predecessor of the 1979 Ordinance, while section 18A was the comparable section to the present Section 53. Be that as it may, in case an assessee defaults in paying advance tax under Section 53, the Assessing Officer can impose additional tax under Section 87 for such default and may even frame an order under Section 87."
35. It was held by the Sindh High Court in Karachi Port Trust that, "a perusal of Section 147 leads to the conclusion that once such estimate is filed whether right or wrong, there is no provision which provides any authority to the Taxation Officer to discard this estimate and ask the taxpayer to continue paying the tax in accordance with the provision of subsection (1) of Section 147 read with subsection (4) of Section 147... We are of the considered opinion that once an estimate is filed, the only option available to the Taxation Authority is to levy default surcharge under subsection (1B) of Section 205 after completing the assessment, if such default surcharge is leviable on the basis of the assessment. The language of subsection (7) of Section 147 is also clear which provides an authority to the Taxation Authorities to recover advance tax not paid as if it was a tax due under an assessment order so that provisions of Section 137(2) are not violated." This was a case where the Tax Department had sought to recover advance tax despite the fact that an estimate for purposes of Section 147(6) of the 2001 Ordinance had been filed by the taxpayer, which was rejected by the Taxation Department at a time when the second proviso to Section 147(6) was not a part of the Income Tax Ordinance.
36. Likewise, it was held by the Sindh High Court in Sui Northern Gas Pipelines Limited that the Tax Department was not vested with authority in terms of Section 147(7) of the 2001 Ordinance to reject a tax estimate furnished by the taxpayer. The Lahore High Court in Lone Cold Storage, Lahore vs. Revenue Officers, Lahore Electronic Power Co. and others (2010 PTD 2502) held that advance tax is, "an estimated amount of proposed income tax to be paid by the taxpayer at the close of the Tax Year. After the said estimation the law requires the taxpayer to pay the said estimated amount during the currency of the Tax Year in four quarters. The estimate is to be made by the taxpayer and is not for the tax authorities to question or object till the close of the Tax Year when the law authorizes the tax authorities to verify the advance tax paid and impose additional tax if the advance tax paid has been less than ninety percent of the total income tax liability of the taxpayer." While interpreting the manner in which Section 147 of the 2001 Ordinance is to be given effect, the Sindh High Court in Commissioner (Legal) Inland Revenue vs. E.N.I. Pakistan (M) Ltd., Karachi (2011 PTD 476) noted that, "we may also refer to subsection (7) of Section 147 and Section 205 of this Ordinance which provide deterrent to the taxpayers for filing a wrong estimate under subsection (6) as subsection (7) of Section 147 provides that if there is any shortfall the same may be recovered from the taxpayer as if it was a tax due under an assessment order and subsection (1B) of Section 205 provides if the taxpayer fails to pay advance tax under subsection (4A) or subsection (6) of Section 147 or the taxpayer is less than ninety percent of the tax chargeable for the relevant tax year, he shall be liable to pay default surcharge at the rate of KIBOR plus three percent per quarter."
37. While relying on Lone Cold Storage, this Court in M/s Pak Telecom Employees Trust vs. Federation of Pakistan, etc. (Writ Petition No.2426 of 2016) observed that, "the interpretation awarded to Section 147 generally and subsection (6) of Section 147 particularly is that once the estimate has been filed, the veracity of the same cannot be questioned by the tax department. It is only when the tax return is filed for that respective year and it is found that the same is not correct, the department is entitled to levy additional surcharge as provided in Section 205 of the Income Tax Ordinance, 2001." It was held by this Court in Fauji Fertilizer Company Limited, with regard to an estimate filed under Section 147(6) of the 2001 Ordinance that "there is no provision which provides any authority to the Taxation Officer to discard this estimate and ask the taxpayer to continue paying the tax in accordance with the provision of subsection (1) of Section 147 read with subsection (4) of Section 147... We are of the considered opinion that once an estimate is filed, the only option available to the taxation authority is to levy default surcharge under subsection (1B) of Section 205 after completing the assessment, if such default surcharge is leviable on the basis of the assessment."
38. The law laid down by the precedents, some of which have been discussed above, was summarized by this Court in M/s First Micro Finance Bank Ltd. vs. Federation of Pakistan, etc. (2023 PTD 1095). It was noted that "a taxpayer has the right to file an estimate of the advance tax payable under section 147(6) of the Ordinance and thereafter pay an amount that the taxpayer deems to be due in accordance with such estimate. The Ordinance, at the time of issuance of the impugned notices, vested no authority in the taxation authorities to affect recovery of the amount that they deem to due under section 147 of the Ordinance in contradiction of any tax estimate filed by the taxpayer under section 147(6) of the Ordinance. The scheme of the Ordinance is based on self-assessment undertaken by the taxpayer. The Ordinance then vested power in taxation authorities to undertake reassessment of the tax return filed by a taxpayer in compliance with provisions of the Ordinance and seek recovery of any non-payment or short payment on the basis of such reassessment. Section 147(6) also enables taxpayer to self-assess advance tax liability to the extent that such taxpayer estimates that the tax payable for the relevant tax year is likely to be less than the amount he is required to pay under section 147(1). In the event that the estimate filed by the taxpayer under section 147(6) is incorrect, a remedy is provided under section 205 to impose a surcharge to the extent of short payment to penalize the taxpayer. This was the settled law at the time when the impugned notice was issued."
39. The case law referred to above is applicable for purposes of tax years when the second proviso to Section 147(6) of the 2001 Ordinance, that vests in the Tax Department the authority to reject an estimate, was not a part of the Income Tax Ordinance. The second proviso to Section 147(6) of the 2001 Ordinance, introduced by the Finance Act 2018 and omitted by the Finance Act 2021, has once again been introduced by the Finance Act 2024, with slight modification, as the proviso to Section 147(6B) as follows: 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 this sub-section, 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 set out in sub-section (4) or subsection (4B), as the case may be.
40. The second proviso to Section 147(6) of the 2001 Ordinance was considered by the Lahore High Court in National Power Parks Management Company in which it was observed that, "the amendments in subsection (6) of Section 147 and proviso to subsection (2) - added through the Finance Act, 2018 - of Section 137 of Ordinance, 2001 has introduced sea-change, whereby, besides extending jurisdiction to reject the estimate(s) the Commissioner is also empowered to direct taxpayer to compute advance tax amounts in accordance with the formula of computation provided under subsection (4) of Section 147 of the Ordinance, 2001, and pay the same within the time frame prescribed."
41. It has been correctly noted by the Lahore High Court in National Power Parks Management Company that the second proviso to Section 147(6) of the 2001 Ordinance and the conforming change introduced in the proviso to Section 137(2) of the 2001 Ordinance has changed the statutory scheme. In ordinary course, a taxpayer is obliged to compute his/her/its advance tax liability in accordance with the formulas provided in Section 147(4) and (4B) of the 2001 Ordinance.
Where a taxpayer concludes on the basis of an estimate that the liability to pay tax for the current tax year would be less than that being projected by the computation in accordance with Sections 147(4) or (4B) of the 2001 Ordinance, the taxpayer can file an estimate under Section 147(6) of the 2001 Ordinance along with the relevant workup providing the basis for the estimate formed. The second proviso of Section 147(6) of the 2001 Ordinance for the tax years when it has remained in field, and the proviso to Section 147(6B) for purposes of tax year 2024, vests in the Tax Department the authority to reject an estimate after providing the taxpayer an opportunity to be heard.
Logically, the rejection of the estimate is to be based on reasoning that will form part of an 'order' passed by the Commissioner rejecting such estimate. Where the estimate is rejected, the order will become appealable (as will be discussed later in this judgment). However, to the extent that a taxpayer chooses not to appeal the order or such order is not stayed in appeal proceedings, the taxpayer would be under an obligation to continue to pay advance tax as computed in accordance with the formulas provided under Section 147(4) or (4B) of the 2001 Ordinance. In an event that a taxpayer does not file an estimate under Section 147(6), and also does not discharge its advance tax liability as computed in accordance with Section 147(4) or (4B) as applicable, or the taxpayer files an estimate which is rejected and such order is not stayed and the taxpayer does not comply with such order, the Tax Department can then exercise authority under Section 147(7) of the 2001 Ordinance to undertake collection under Section 137, and if such liability is not voluntarily discharged by the tax payer, seek recovery under Sections 138 and 140 of the 2001 Ordinance.
Can advance tax be collected coercively?
42. The short answer is yes, to the extent that advance tax is not deposited voluntarily in accordance with provisions of Section 4(6) read with Section 147 of the Income Tax Ordinance. As has been discussed above, Section 4(6) of the 2001 Ordinance creates a charge on the income of a taxpayer to the extent of his liability to pay advance tax as computed in accordance with Section 147 and more particularly Section 147(4), (4A), (4B), or (6A) of the 2001 Ordinance, as applicable. In case advance tax liability is not discharged within the period prescribed under Sections 147(5), (5A) or (5B) of the Income Tax Ordinance, as the case may be, the Tax Department is vested with authority under Section 147(7) of the 2001 Ordinance to collect and recover advance tax as if it were a tax due under an assessm ent order. By virtue of Finance Act 2018, a proviso was added to Section 137(2) of the Income Tax Ordinance, which provides that, "the due date for payment of tax payable under subsection (7) of Section 147 shall be the date specified in subsection (5) or subsection (5A) or first proviso to subsection (5B) of Section 147." Just as the date for discharge of tax liability for purposes of Section 4(1) of the 2001 Ordinance is prescribed, the date for discharge of advance tax liability is also prescribed by Section 147(5)/(5A)/(5B) of the 2001 Ordinance.
43. By virtue of the deeming provision in Section 147(7) of the 2001 Ordinance, the advance tax due, as computed in accordance with Section 147(4) or (4B), has been treated as tax due pursuant to an assessm ent order. Section 137(1) of the 2001 Ordinance provides that the income tax payable for a tax year is due on the date of furnishing of the income tax return. By virtue of the second proviso to Section 137(2) of the 2001 Ordinance, the due date for payment of advance tax has been clarified. Just as the Tax Department is obliged to issue a notice under Section 137 of the 2001 Ordinance where a taxpayer fails to discharge its tax liability by the due date for payment of income tax for the tax year, where a taxpayer fails to discharge its liability to pay advance tax by the due date, as prescribed in Section 147(5)/(5A)/(5B) read with the proviso to Section 137(2), the Tax Department is under an obligation to issue notice to the taxpayer under Section 137(2) of the 2001 Ordinance specifying the amount payable and requiring that such payment be made within a period of thirty days. The purpose of issuing a notice under Section 137(2) of the 2001 Ordinance is to communicate to the taxpayer that its obligation to pay advance tax is overdue and the Tax Department is affording the taxpayer an opportunity to voluntarily discharge such obligation to enable the Tax Department to perform its function of collecting advance tax. In the event that such obligation is not discharged in accordance with the notice under Section 137(2), the Tax Department would then need to issue a notice under Section 138(1) of the Income Tax Ordinance.
The purpose of serving such notice is to put the taxpayer on notice that the Tax Department has moved on from the stage of collection of advance tax paid voluntarily to the recovery of such tax through coercive means identified in Section 138(2) of the 2001 Ordinance.
44. The issuance of notices under Sections 137 and 138 of the 2001 Ordinance are also required as the taxpayer may have filed an estimate for purposes of Section 147(6) of 2001 Ordinance, which may then have been rejected by the Tax Department in exercise of authority under the second proviso of Section 147(6) or the proviso to Section 147(6B), as applicable, in which case the due date for payment of advance tax would have already passed. The Tax Department would thus initially invite the taxpayer to discharge the liability to pay advance tax on a voluntary basis under Section 137, failing which it would notify the taxpayer of its intention to use its coercive powers under Section 138 to recover advance tax. This is the scheme for collection and recovery of advance tax, which has been incorporated within Section 147 by virtue of Section 147(7) of the 2001 Ordinance. Any recovery affected without issuing the aforementioned notices would be in breach of requirements of Section 147(7) read with Sections 137 and 138 of the 2001 Ordinance, and would fall foul of the taxpayer s right to due process guaranteed by Article 10A of the Constitution and would thus be illegal.
The remedy of appeal re advance tax recovery
45. Section 127 of the 2001 Ordinance lists the cases in which appeal against an order can be filed before Commissioner (Appeals), and does not explicitly include an order under Section 147 of the 2001 Ordinance. It was held by the Sindh High Court in Pak-Saudi Fertilizers Limited that an order demanding advance tax payment together with default surcharge would be an appealable order under provisions of the Income Tax Ordinance, 1979. The issue under Section 147 of the 2001 Ordinance was considered by the Lahore High Court in National Power Parks Management Company where it was held in the context of the Tax Department rejecting an estimate in terms of the second proviso to Section 147(6) of the 2001 Ordinance that, "the words or an order having the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the person' are meaningful and cannot be ignored. Learned counsel for the petitioner has objected that conditions prescribed for exercise of authority in terms of provisos to subsection (6) of Section 147 were not available, which questions alongwith other ancillary issues can appropriately be raised and may be examined by the appellate forum, in case appeal is filed." The Lahore High Court therefore found that while Section 147 is not explicitly mentioned in Section 127 of the 2001 Ordinance, Section 127 provides for an appeal where an order has the effect "of enhancing the assessment or reducing a refund or otherwise increasing the liability of the person."
46. This Court agrees with such interpretation of the second proviso to Section 147(6) read with Section 127 of the 2001 Ordinance. Where the Tax Department rejects an estimate filed by the taxpayer claiming a reduction in advance tax liability and insists that the taxpayer must continue to discharge such higher advance tax liability as computed under Section 147(4) or (4B), as applicable, such order would amount to increasing the liability of the taxpayer who can then file an appeal against such order before Commissioner (Appeals) in terms of Section 127 of the Income Tax Ordinance. Where, however, the taxpayer neither files an estimate in terms of the second proviso to Section 147(6) or the proviso to Section 147(6B) of the 2001 Ordinance, as applicable, nor discharges its obligation to pay advance tax as computed under the formulas provided under Section 147(4) or (4B) of the 2001 Ordinance, as applicable, and the Tax Department issues a notice to the taxpayer under Section 147 read with Sections 137 and 138 of the 2001 Ordinance for purposes of collection and/or recovery, such notices are not being issued in the aftermath of an order increasing the liability of a taxpayer, but are merely being issued in exercise of the authority of the Tax Department to collect and/or recover advance tax liability as determined in accordance with the statutory formulas provided under Section 147(4) or (4B). Such notices do not constitute orders for purposes of Section 147 and can therefore not be challenged in appeal under Section 127 of the 2001 Ordinance.
47. Having enumerated the law, we can now apply the same to the facts of the petitions to the Writ Petitions at hand. In Writ Petition No.181 of 2019, the details of which have been provided in Para-3 above, recovery was affected without the Tax Department issuing any notice to the petitioner under Section 137 or 138 of the 2001 Ordinance. The Tax Department simply elected to issue a notice under Section 140 of the 2001 Ordinance to the bank with which the petitioner was maintaining an account and coercively recovered the advance tax demand from the petitioner's bank account.
Such recovery was illegal for having been undertaken in breach of due process requirements prescribed under Section 147(7) read with Sections 137 and 138 of the 2001 Ordinance and is therefore declared to be without legal authority. Section 147(10) of the 2001 Ordinance provides that any excess advance tax payment is to be refunded to the taxpayer in terms of Section 170 of the 2001 Ordinance. The learned counsel for the petitioner submitted that a refund application was filed and refund in the amount of Rs.937.34 million was claimed by the petitioner, which has not been processed thus far. The learned counsel for the petitioner also submitted that it had filed an estimate with the Tax Department in terms of Section 147(6) of the 2001 Ordinance stating that there was no advance tax liability as a refund was already overdue to the petitioner for the previous tax year. The filing of an estimate has been denied by the Tax Department and the learned counsel for the petitioner has also fairly conceded that the issue of filing of an estimate remains contested. This Court in its constitutional jurisdiction cannot resolve this factual dispute.
However, as a tax refund has already been claimed by the petitioner, which the Tax Department is under an obligation to decide within sixty days of receipt of the refund application in terms of Section 170(4) of the Income Tax Ordinance, and such statutory obligation has not been discharged by the Commissioner, the Commissioner shall decide the said application within sixty days from the announcement of this judgment and will also pass an appropriate order for purpose of Section 171 of the 2001 Ordinance to consider any additional payment due by the Tax Department to the petitioner for delayed refund.
48. In Writ Petition No.4497 of 2022, the advance tax demand was generated on the basis of a reassessm ent order issued by the Commissioner dated 11.08.2022, which order was annulled by the Commissioner (Appeals) on 27.09.2022. By virtue of annulment of the reassessment order the assessm ent order filed by the petitioner for tax year 2023 remained in the field and the advance tax liability in terms of Section 147(4) of the 2001 Ordinance was to be computed in accordance with the tax return filed by the petitioner, which was the deemed assessment, and not the reassessm ent order passed by the Commissioner. While a notice under Section 147 of the 2001 Ordinance was issued on 01.09.2022 prior to the annulment of the reassessment order, no notice under Section 137 was issued after annulment of the reassessment order, and the notice under Section 138(1) of the 2001 Ordinance was also issued on 18.11.2022 after the annulment of the reassessm ent order. The Tax Department coercively affected recovery of advance tax computed on the basis of an annulled reassessment order on 28.11.2022. Such action taken by the Tax Department in full view of the fact that the reassessment order stood annulled. The recovery of advance tax liability computed on basis of an annulled reassessment order was therefore colorable exercise of authority that suffered from illegality. The said recovery notices are therefore declared to be illegal along with the recovery coercively recovered from the petitioner. As the petitioner has filed an application for refund claiming Rs.47.51 million, which has not been processed as yet, the Commissioner shall decide such application within a period of sixty days from the announcement of this judgment, and while making such order will also consider if any additional payment for delayed refund is due to the petitioner in terms of Section 171 of the 2001 Ordinance.
49. In Writ Petition No.4558 of 2022, the petitioner filed an estimate in terms of Section 147(6) of the 2001 Ordinance on 16.09.2022 for tax year 2023. The Commissioner was vested with no statutory authority in such tax year to reject the estimate filed by the taxpayer. However, notwithstanding the filing of such estimate, which the Commissioner had no authority to reject or disregard, a notice under Section 138(1) of the 2001 Ordinance was issued on 26.09.2022 and recovery was coercively affected by issuance of a notice under Section 140 of the 2001 Ordinance dated 10.11.2022. These recovery notices could not have been issued after the filing of an estimate by the taxpayer and are therefore declared to be illegal and without lawful authority. As the petitioner has filed an application for refund claiming Rs.45.16 million for tax year 2023, which has not been processed as yet, the Commissioner shall decide such application within a period of sixty days from the announcement of this judgment, and while making such order will also consider if any additional payment for delayed refund is due to the petitioner in terms of Section 171 of the Income Tax Ordinance.
50. The petitions are allowed in the above terms, along with costs in the amount of Rs.100,000/- payable by respondent No.2 in each petition to the petitioner, within a period of thirty days.