The Federal Tax Ombudsman (FTO) has held that obtaining tax deposits from taxpayers during proceedings under Section 175C of the Income Tax Ordinance, 2001, without subsequently determining liability through the prescribed legal process, constitutes maladministration and is contrary to the principles of due process and fair administration.
The FBR has been directed to submit a compliance report within 45 days.
The complaint was filed by the owner of Noor Surgical Hospital, Abbottabad, who alleged that officials of the Inland Revenue Department visited the hospital premises and initiated proceedings under Section 175C of the Income Tax Ordinance, 2001. The complainant contended that a substantial amount was recovered under coercive circumstances without any lawful assessment, adjudication, or determination of tax liability.
In response, the Federal Board of Revenue (FBR) maintained that the proceedings were initiated lawfully and that the taxpayer voluntarily deposited the amount during the course of monitoring and inquiry proceedings. The Department denied any allegation of coercion or maladministration and asserted that the payment was made by the taxpayer of his own accord.
During the proceedings before the FTO, both parties were afforded an opportunity to present their respective positions. The Department relied on documentary evidence to support its claim that the payment was voluntary. However, no speaking order, assessment order, or other legal determination establishing the nature of the alleged default or tax liability was produced before the Forum.
After examining the available record, the Ombudsman observed that Section 175C is primarily an investigative provision that empowers Inland Revenue authorities to conduct inquiries, obtain information, and monitor business activities for tax purposes. The provision does not authorize the recovery or collection of taxes without determination of liability through the statutory assessment mechanism provided under the law.
The FTO noted that once the amount was deposited, the Department discontinued the proceedings and failed to pursue them to their logical conclusion. The absence of any speaking order explaining the basis of the liability, the nature of the alleged default, or the final outcome of the proceedings rendered the Department’s conduct legally unsustainable.
The Ombudsman further observed that the practice of obtaining so-called “voluntary deposits” during inquiry proceedings raises serious concerns regarding transparency, fairness, and the unequal bargaining position between taxpayers and revenue authorities. Such deposits cannot substitute the legal process required for determination and recovery of tax.
The FTO concluded that Section 175C does not provide unfettered authority to collect revenue outside the statutory framework and that any deposit obtained without a subsequent legal determination may amount to unauthorized recovery. The failure to issue a speaking order after obtaining a monetary deposit was held to be inconsistent with the principles of due process and fair administration. Consequently, the actions of the Department were found to fall within the definition of maladministration under the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.
Accepting the complaint, the FTO recommended that the Federal Board of Revenue conduct a fact-finding inquiry into the circumstances under which the amount was obtained from the complainant, fix responsibility where officers are found to have acted beyond lawful authority, and ensure that no coercive or retaliatory action is taken against the complainant except strictly in accordance with law. The Ombudsman also recommended the issuance of administrative guidelines governing the acceptance of “voluntary deposits” during inquiry and monitoring proceedings to ensure transparency and compliance with the statutory framework.
