The Supreme Court of Pakistan has ruled that the statutory timeframe for retaining tax records, typically set at six years under Section 174(1) of the Income Tax Ordinance, 2001, becomes secondary if a legal proceeding is pending.
The Court emphasized that the retention of tax documents must continue until the case reaches its final conclusion, irrespective of how much time has passed since the original assessment.
This landmark decision came in a case related to the tax year 2010, where a taxpayer had challenged the Federal Board of Revenue’s (FBR) demand for producing financial records, arguing that the statutory record retention period had expired. A three-member bench of the Supreme Court, led by Chief Justice Yahya Afridi and including Justice Muhammad Shafi Siddiqui and Justice Miangul Hassan Aurangzeb, overturned a Lahore High Court (LHC) ruling that had favored the taxpayer.
The crux of the matter was whether the taxpayer was obligated to maintain records beyond five years from the date of deemed assessment, which in this case was around September 30, 2010. The FBR had issued a show cause notice on February 27, 2015, well within the permitted timeframe, and the reassessment process had subsequently commenced. Though the taxpayer challenged the notice in court, the Supreme Court held that once a matter becomes subjudice, the requirement to retain records under Section 174 continues until the final adjudication.
The apex court underscored that the proviso to Section 174(1) specifically allows for an extended obligation to maintain tax documents when a case is under legal scrutiny. The court observed that even if no stay is granted, the very existence of ongoing litigation dilutes the impact of the six-year limit for record retention. This clarification is crucial, particularly in long-drawn tax disputes, ensuring the department can access relevant documents for fair adjudication.
Additionally, the Supreme Court criticized the blanket immunity granted to the taxpayer by the LHC regarding the production of records. It stated that while the law provides a timeframe, the proviso and explanation introduced by the Finance Act 2010 make it clear that the taxpayer must retain the record until the case reaches its conclusion.
With this ruling, the Court has reinforced the FBR’s authority to demand records during ongoing proceedings and has clarified the application of record-keeping laws in subjudice matters. This judgment will likely serve as a precedent in future cases involving prolonged tax disputes and record production obligations.