Ombudsman says tax deposits cannot be taken without legal assessment; orders FBR to ensure due process and transparency in inquiry proceedings
The Federal Tax Ombudsman (FTO) has held that obtaining tax deposits during inquiry proceedings without first determining liability through lawful assessment procedures constitutes maladministration and violates principles of due process and fair administration.
In a detailed ruling, the Ombudsman directed the Federal Board of Revenue (FBR) to submit a compliance report within 45 days and take corrective measures to prevent recurrence of such practices.
The case originated from a complaint filed by the owner of Noor Surgical Hospital in Abbottabad, who alleged that Inland Revenue officials conducted proceedings under Section 175C of the Income Tax Ordinance, 2001, and recovered a substantial amount without issuing any lawful assessment or adjudication order.
FBR claims voluntary payment
The FBR maintained that the amount was deposited voluntarily during monitoring and inquiry proceedings, denying any coercion. The department argued that the taxpayer had willingly complied during field-based inquiries.
However, during proceedings, the Ombudsman noted that the department failed to present any speaking order, assessment order or formal determination establishing tax liability.
Section 175C scope clarified
After reviewing the record, the FTO observed that Section 175C of the Income Tax Ordinance allows Inland Revenue authorities to conduct inquiries, gather information and monitor business activity, but does not authorize recovery or collection of tax without a prior legal determination of liability.
The ruling emphasized that investigative powers cannot be used as a substitute for the statutory assessment and adjudication process required under tax law.
Absence of legal order
The Ombudsman further noted that after obtaining the deposited amount, the department did not conclude proceedings through a formal order explaining the alleged default or basis of liability.
The absence of a speaking order, the ruling stated, rendered the action legally unsustainable and inconsistent with principles of transparency and accountability.
Concerns over “voluntary deposits”
The FTO also raised concerns over what it described as a growing practice of collecting “voluntary deposits” during inquiry and monitoring operations.
It stated that such payments cannot replace formal tax assessment procedures and may create an imbalance between taxpayers and tax authorities if not properly regulated.
Maladministration declared
The ruling held that Section 175C does not grant unrestricted powers to collect revenue outside the statutory framework. Any amount obtained without subsequent legal determination may constitute unauthorized recovery.
The Ombudsman therefore concluded that the conduct of the department amounted to maladministration under the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.
Directions to FBR
The FTO recommended that the FBR conduct a fact-finding inquiry into the circumstances under which the amount was collected and fix responsibility on officials found to have exceeded their authority.
It further directed the FBR to ensure that no retaliatory action is taken against the complainant except in accordance with the law.
The Ombudsman also advised the formulation of clear guidelines governing “voluntary tax deposits” during inquiry and monitoring proceedings to safeguard taxpayer rights and ensure legal compliance.
The ruling is being seen as a significant reaffirmation of taxpayer protections, reinforcing that tax collection must follow due process, formal assessment and documented determination of liability before any recovery action can be taken.
