Section 140 of the Income Tax Ordinance 2001 allows tax authorities to direct third parties to pay money towards a taxpayer’s outstanding tax, subject to specified legal safeguards.
ISLAMABAD: The Federal Board of Revenue (FBR) has explained Section 140 of the Income Tax Ordinance 2001, which empowers tax authorities to recover outstanding tax by directing persons holding or owing money to a taxpayer to pay the specified amount to the Commissioner Inland Revenue.
The updated ordinance, issued up to June 30, 2026, applies to Tax Year 2027, covering July 1, 2026, to June 30, 2027.
Under Section 140(1), the Commissioner may issue a written notice requiring a person to pay money towards a taxpayer’s outstanding tax liability if that person owes or may owe money to the taxpayer, holds or may hold money on the taxpayer’s behalf, holds money through another person for payment to the taxpayer, or has authority to make such a payment.
The notice must specify the amount to be paid and the date by which payment is required.
Safeguard for taxpayers filing appeals
Section 140 provides a specific safeguard for taxpayers challenging tax demands before the Commissioner (Appeals).
Under the proviso to sub-section (1), the Commissioner cannot issue a recovery notice under this provision where the taxpayer has filed an appeal under Section 127 against the order creating the tax liability and the appeal remains undecided, provided the taxpayer has paid 10 per cent of the tax due.
The provision links the restriction to the specified appeal and payment conditions.
Recovery limited to the outstanding liability
Under Section 140(2), the amount demanded from a third party cannot exceed the money held or payable where that amount is less than or equal to the taxpayer’s outstanding tax. In other cases, the notice may require payment of only the amount sufficient to settle the tax liability.
Sub-section (3) also allows the Commissioner to issue a notice covering a series of payments, such as salary payments, with a specified amount deducted from each payment until the outstanding tax has been paid.
However, under sub-section (4), the payment date specified in the notice cannot fall before the money becomes payable to the taxpayer or is held on the taxpayer’s behalf.
Protection for third parties complying with notices
Section 140(5) extends the application of Sections 160, 161, 162 and 163, so far as applicable, to amounts payable under this recovery mechanism.
Under sub-section (6), a person who complies with the notice is treated as having paid the amount under the taxpayer’s authority. The Commissioner’s receipt provides a valid discharge of that person’s liability to the taxpayer to the extent of the amount covered by the receipt.
Special recovery provision for major tax demands
Section 140(6A) contains a separate provision for certain substantial tax demands that have been upheld at multiple appellate levels.
Under this provision, tax becomes immediately payable where the department has succeeded at three appellate forums, including the High Court; recovery is restricted to the lowest amount of demand confirmed by any of those three forums; and the outstanding tax exceeds Rs200 million.
Where these conditions are met, the Commissioner is required to proceed with recovery irrespective of the time allowed under other provisions or the relevant court or forum decision.
Section 140 also defines the term “person” broadly to include a court, tribunal or other authority.
The provision establishes a mechanism for recovering tax through third parties who hold or owe money to taxpayers, while setting limits on the amount recoverable, the timing of payment and the circumstances in which recovery notices may be issued.