Islamabad, In a landmark judgment that carries wide implications for Pakistan’s tax administration system, the Supreme Court of Pakistan has firmly ruled that tax authorities must not act as punitive or coercive bodies, but rather as state institutions focused on providing guidance, support, and procedural fairness to taxpayers.
The ruling, authored by Justice Ayesha A. Malik, is seen as a significant development in taxpayer rights jurisprudence and a reminder that tax collection must remain within the bounds of law, due process, and administrative fairness.
The verdict was delivered in appeals filed by the Commissioner Inland Revenue (Legal), Islamabad against Pakistan LNG Limited and Serene Air (Pvt) Limited, contesting Islamabad High Court’s earlier decisions that had declared coercive recovery actions illegal.
Background of the Case: Two Major Tax Recovery Disputes
The Supreme Court was hearing two separate but similar cases involving Pakistan LNG Limited and Serene Air Private Limited, both of which had challenged the legality of tax recovery notices issued under Section 140 of the Income Tax Ordinance, 2001.
The central issue was the manner in which Inland Revenue authorities proceeded to recover substantial tax amounts from both companies—Rs. 2.90 billion from Pakistan LNG Limited and Rs. 1.80 billion from Serene Air—without providing adequate notice or complying with the due process requirements laid out in the law.
Details of the Pakistan LNG Limited Case
In the first case, Pakistan LNG Limited’s income tax return for the year 2020 was amended on March 15, 2021, under Section 122(5A) of the Income Tax Ordinance. As per this amendment, a tax liability of Rs. 2.90 billion was determined.
- On the same day, a notice under Section 137(2) was issued, asking for tax payment.
- The company challenged the amendment before the Commissioner Inland Revenue (Appeals).
- The appeal was decided in favor of the taxpayer on March 9, 2022, and the order was uploaded on the FBR’s IRIS portal at 3:28 PM.
- Within hours, a recovery notice under Section 140 was issued, leading to coercive bank account recoveries.
The High Court, in its ruling, declared this recovery illegal, ordered the return of the seized amount, and held that the tax authority’s conduct violated principles of due process.
Details of the Serene Air Case
In the second case involving Serene Air (Pvt) Limited, the Inland Revenue completed proceedings under Sections 161 and 205 on March 31, 2022, for the tax year 2020.
- A notice under Section 137(2) was issued on the same day, demanding Rs. 1.80 billion in taxes.
- Serene Air filed an appeal, which was decided on May 11, 2023.
- However, immediately after the decision, Section 140 notices were issued to banks to recover the money.
- This action, too, was challenged and ultimately struck down by the courts for violating procedural safeguards.
Supreme Court’s Observations and Final Ruling
Justice Ayesha Malik, writing for the three-member bench that included Justice Muneeb Akhtar and Justice Shahid Waheed, offered strong criticism of the tax department’s conduct and reaffirmed that tax collection must be lawful and transparent.
Section 140: No Immediate Recovery Without Clear Deadline
The Court ruled that Section 140 of the Income Tax Ordinance does not allow immediate coercive action unless:
- The taxpayer has been given proper notice,
- A specific deadline for payment is mentioned,
- The party in possession of the taxpayer’s funds (usually a bank) is also given time to respond.
The judgment stated that Section 140 notices issued in both cases lacked these critical elements, thereby violating legal procedures and taxpayer rights.
“Tax recovery cannot be a ‘grab and go’ process,” said Justice Ayesha Malik. “Even coercive measures must be based on fair, lawful, and clearly communicated procedures.”
Role of Tax Authorities: Not Enforcers, But Facilitators
In one of the most pivotal portions of the judgment, the Court emphasized the role and responsibility of tax institutions in a constitutional democracy.
“Tax authorities are not punitive arms of the state; they are facilitators meant to guide and assist taxpayers,” wrote Justice Malik. “Their conduct must reflect clarity, transparency, and procedural fairness.”
She stressed that the legality and effectiveness of a tax system depends not only on enforcement but also on whether taxpayers understand their obligations and the consequences of non-compliance, within a fair and just legal framework.
Key Legal and Administrative Takeaways
1. Due Process Is Essential
The Court made it clear that coercive tax recovery actions without due notice violate constitutional protections and the principles of natural justice.
2. IRIS Upload Timing Cannot Justify Coercion
The FBR’s act of uploading appeal decisions on the IRIS portal minutes before initiating recovery was criticized as a breach of good governance.
3. Section 140 Cannot Be Misused
Tax officers must not use Section 140 as a shortcut to instant fund recovery, bypassing lawful processes.
4. Refund of Illegally Collected Amounts
In both cases, the court ordered the immediate return of recovered amounts, reinforcing the importance of legal safeguards for taxpayers.
Implications for Businesses and Tax Professionals
The Supreme Court’s ruling sets a strong precedent that will influence future tax administration practices in Pakistan. Corporate taxpayers and chartered accountants, tax lawyers, and compliance officers will likely see this judgment as a protective shield against arbitrary or hasty actions by tax authorities.
It is expected that the Federal Board of Revenue (FBR) and its field officers will now be more cautious in initiating coercive recovery actions without fulfilling all procedural requirements.
Reactions from Legal and Tax Circles
Legal experts hailed the decision as a progressive judgment that strengthens taxpayer rights and rule of law.
“Justice Ayesha Malik’s ruling reinforces that tax departments are service institutions—not just revenue collection machines,” said Advocate Hassan Raza, a Lahore-based tax lawyer. “This will ensure more accountability in tax administration.”
Business leaders and chambers of commerce have also appreciated the verdict. The Pakistan Business Council (PBC) called it a timely intervention that restores confidence in the judicial system and protects business interests.
Conclusion: A Balanced Approach to Tax Collection
The Supreme Court’s message is unequivocal: tax collection must be carried out in accordance with the law, fairness, and procedural integrity. While the state has every right to collect revenue, the methods used must respect legal boundaries and maintain the trust of the taxpayer.
The judgment will likely prompt policy reforms within the FBR and encourage training and accountability of tax officers to ensure compliance with court directives.
By defining the boundaries of coercive power and reinforcing citizen-centric governance, this decision serves as a guiding principle for tax law enforcement in Pakistan going forward.
