Taxpayer can’t be asked for record beyond six years

The Supreme Court has ruled that a taxpayer cannot be asked to furnish record beyond a period of six years.

“We hold that a taxpayer is obliged to maintain the record under Section 174(3) of the Ordinance for a period of six years,” a five-page judgment authored by Justice Syed Mansoor Ali Shah read while rejecting the Federal Board of Revenue's (FBR) plea against a Lahore High Court order, which had set aside a notice to the taxpayer.

A three-judge bench of the apex court led by Chief Justice of Pakistan Umar Ata Bandial heard the matter.
“The taxpayer cannot be compelled to produce the record for a tax year beyond the period of six years as stipulated in Section 174(3) of the Ordinance,” the verdict added.

The court noted that reading of the ordinance and the rules envisaged that any proceedings against a taxpayer that were based on the tax records maintained by them should be initiated within a fixed timeframe.

The order read that Section 174 created an obligation on the taxpayer to maintain such accounts, documents and records as prescribed for a period of six years. The only exception in this case was of pending proceedings, where the taxpayer is obligated to maintain the record till the final decision of the proceedings

“The same provision protects the taxpayer from being asked to produce the record beyond the said period.”
The judgment read notices under sections 161 and 165 and Rule 44(4) could only be replied to on the basis of the record maintained by the taxpayer.

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“[Therefore] a joint reading of sections 161 and 165 and Rule 44(4) and Section 174(3) and Rule 29 establishes that the tax department is under an obligation to be vigilant and efficient enough so as to proceed against a taxpayer within the statutory timeframe provided under Section 174(3).”

The court noted that though there was no specific limitation for issuance of notices under Section 161(1A) or 165(2B) or Rule 44(4), but these provisions could not be actualised or given effect to unless the record, available with the taxpayer, was examined and verified by the tax authorities. “Since the aforesaid provisions of law require taxpayer to maintain record for a period of six years, hence notices beyond a period of six years cannot be given effect to. As the taxpayer is under no legal obligation to maintain tax records after the said statutory period, any such notices demanding the taxpayer to furnish such information are inconsistent with the clear provisions of the ordinance and hence unlawful.”

The court also noted that a harmonised reading of the statute required that Section 174(3) and sections 161 and 165 and Rule 44(4) must complement each other so as to promote the purposes of the ordinance and equally protect and safeguard the rights of both the tax manager and the taxpayer “Therefore, even though notices under sections 161(1A) and 165(2B), and Rule 44(4) have no prescribed period of limitation, the statutory timeframe kicks in the minute the time period under Section 174(3) is exhausted rendering such notices ineffective and unenforceable, attracting no penal consequences for the taxpayer.”

The court noted that the respondent taxpayer was under an obligation to deduct tax from an amount to be paid to a recipient at the time and in the manner specified in Section 158 of the Ordinance.

“Section 165 read with Rule 44(4) of the rules requires a taxpayer, who deducts tax, to furnish a statement/reconciliation statement giving details of the amount of tax deducted and collected from a recipient. The said statement and reconciliation statement has to be prepared on the basis of the tax records maintained by the taxpayer under the law. A taxpayer, under the law, is to retain tax records under Section 174(3) of the Ordinance read with Rule 29(4) of the rules for a period of six years after the end of the tax year to which they relate [to].”