Ombudsman rules recovery became unlawful after appellate authority set aside the original sales tax assessment
ISLAMABAD: The Federal Tax Ombudsman (FTO) has directed the Federal Board of Revenue (FBR) to immediately restore a taxpayer’s attached bank account and process a sales tax refund, ruling that the legal basis for the recovery ceased to exist once the original assessment order was set aside on appeal.
According to an FTO order issued on July 7, 2026, the complaint was filed by M/s Horizon Alloys (Pvt) Ltd against the Revenue Division over the alleged unlawful recovery of funds through bank attachment, delay in implementing the appellate order, and failure to refund the recovered amount despite the assessment being overturned.
Assessment led to recovery of Rs24.51 million
The company stated that the Deputy Commissioner Inland Revenue (DCIR), Unit-01, Zone-III, Corporate Tax Office (CTO) Karachi, passed an ex-parte assessment order under Section 11E of the Sales Tax Act, 1990 on May 21, 2025.
The order created a sales tax demand of Rs21.29 million, imposed an equivalent amount as penalty, and resulted in the recovery of Rs24.51 million through attachment of the company’s bank account.
According to the taxpayer, the assessment was based solely on purchases made from Three Star Oil Traders, a supplier that was subsequently suspended or block listed, even though the transactions had been carried out while the supplier was in active status.
The company further pointed out that the supplier’s registration was restored by the tax authorities on June 26, 2025, but the recovered amount was not refunded.
Appeal set aside assessment
The Commissioner Inland Revenue (Appeals-VII), Karachi set aside the assessment order on March 25, 2026, directing the tax department to conduct fresh adjudication after providing the taxpayer with a reasonable opportunity of being heard.
Following the appellate decision, the company filed a refund application under Section 66 of the Sales Tax Act, 1990, and requested early disposal of the remand proceedings. However, it alleged that the department failed to take any action.
In its reply, CTO Karachi maintained that appeal-effect proceedings were in progress and argued that the law allowed the department until June 30, 2028, to complete the reassessment. The department contended that there was no legal requirement to expedite the proceedings.
FTO rejects department’s stance
Rejecting the department’s objections, the Federal Tax Ombudsman held that once the appellate authority had set aside the assessment order, the original order ceased to have legal effect.
The Ombudsman observed that the bank attachment and recovery were entirely dependent upon the existence of that assessment order. Consequently, once the order was annulled, the legal authority to retain the recovered amount also disappeared.
The FTO further ruled that the tax department could not continue withholding the recovered funds merely because a fresh tax demand might arise after completion of the reassessment.
According to the order, the Rs24.51 million recovered through bank attachment is refundable under Section 66 of the Sales Tax Act, 1990, and payment of the refund would not prejudice the department’s right to complete reassessment proceedings within the statutory timeframe.
FTO issues directions to FBR
The Ombudsman recommended that the FBR instruct the Commissioner Inland Revenue, Zone-III, CTO Karachi, to immediately detach the taxpayer’s bank account and issue an appeal-effect order in accordance with the appellate decision.
The FTO also directed the Commissioner Refund, CTO Karachi, to decide the taxpayer’s refund application strictly on merit and in accordance with the law, while requiring the department to submit a compliance report within 45 days.