Commissioner empowered to determine taxable income and tax liability using available information and sectoral benchmark ratios
The Federal Board of Revenue (FBR) has set out the rules governing best-judgement assessment for Tax Year 2027, giving tax authorities the power to determine a taxpayer’s taxable income and tax liability where required returns, statements, accounts or supporting records are not furnished.
Under Section 121 of the Income Tax Ordinance, 2001, updated up to June 30, 2026, the Commissioner may make a best-judgement assessment where a person fails to comply with specified filing or documentation requirements.
For Tax Year 2027, which runs from July 1, 2026 to June 30, 2027, the provision applies where a taxpayer fails to furnish an income tax return in response to notices issued under Section 114 or Section 117, or fails to submit a return required under Sections 143 or 144.
The provision also covers failure to furnish a statement required under Section 116. In addition, the Commissioner may proceed with a best-judgement assessment if the taxpayer does not produce accounts, documents, records or other relevant evidence required for determining taxable income and tax payable.
FBR can use available information
Under Section 121, the Commissioner can determine taxable income and tax due on the basis of any available information or material and to the best of his judgement.
Any assessment purported to have been made on the basis of a return or revised return filed by the taxpayer would have no legal effect where the requirements for a best-judgement assessment have been triggered.
Sectoral benchmarks introduced
A significant feature of Section 121 is the authority given to the Commissioner to determine taxable income using sectoral benchmark ratios prescribed by the FBR.
The Ordinance defines these as standard business-sector ratios notified by the Board on the basis of comparative cases. They may include financial ratios, production ratios, gross profit ratios, net profit ratios, recovery ratios and wastage ratios, as well as other prescribed sector-specific benchmarks.
This mechanism could allow the tax authority to assess income by comparing a taxpayer’s reported position with established benchmarks for the relevant business sector.
Assessment order must disclose tax details
After making an assessment under Section 121, the Commissioner is required to issue an assessment order to the taxpayer as soon as possible.
The order must state the taxpayer’s taxable income, amount of tax due and tax already paid, if any. It must also explain the time, place and manner for filing an appeal against the assessment.
Six-year limitation for assessment
The FBR has also retained a statutory time limit for issuing an assessment order under Section 121.
Generally, an assessment order may only be issued within six years after the end of the relevant tax year or income year.
However, a special limitation applies where a notice for furnishing a return under Section 114(4) is issued concerning one or more of the last ten completed tax years under the relevant proviso to Section 114(5). In such cases, the assessment order under Section 121 may only be issued within two years from the end of the tax year in which the notice was issued.
The provision therefore places an obligation on taxpayers to comply with return-filing and record-production requirements, while providing the Commissioner with a statutory mechanism to determine tax liability where the required information is not supplied.