ISLAMABAD: The Supreme Court has ruled that penalties imposed under the Income Tax Ordinance (ITO) 2001 on assessments governed by the repealed Income Tax Ordinance 1979 are unlawful and cannot be applied retrospectively.
In this regard, a five-member bench, headed by Justice Shahid Waheed, settled a legal dispute arising from conflicting judgments of two three-member benches of the Supreme Court concerning the retrospective application of tax penalties.
The bench held that penalties under Sections 182, 184 and 186 of the ITO 2001 could not be imposed on assessments completed under the repealed ITO 1979 before June 30, 2002, unless the legislature had expressly provided for retrospective application.
The 17-page judgment, authored by Justice Aqeel Ahmed Abbasi, also resolved the conflict between the Supreme Court’s 2009 judgment in the Eli Lilly Pakistan (Pvt) Ltd case and its 2016 judgment in the Islamic Investment Bank Ltd case.
The court observed that the earlier Eli Lilly judgment had correctly held that assessments completed under the repealed ITO 1979 were to be governed by the law applicable at the relevant time.
The larger bench declared that the contrary interpretation adopted in the Islamic Investment Bank case was erroneous in law.
It endorsed the principle that substantive and penal provisions of tax law ordinarily operate prospectively unless the legislature clearly provides otherwise.
The case originated from proceedings against taxpayer Khadim Hussain, who had purchased property on September 7, 1999, without filing a corresponding tax return.
After the taxpayer failed to comply with notices issued by the tax authorities, an ex-parte assessment was framed under Section 63 of the repealed ITO 1979. The assessment resulted in an income addition of Rs300,000 for assessment years 2000-01 to 2002-03.
In this regard, a penalty was subsequently imposed under Section 184 of the ITO 2001 read with Section 111 of the repealed ordinance.
The taxpayer challenged the assessment and penalties before the commissioner of income tax (appeals).
The tax department challenged the decision before the Income Tax Appellate Tribunal, but the appeal was dismissed on the grounds that the penalties were not legally sustainable under Section 239 of the ITO 2001.
The department subsequently approached the Lahore High Court’s Rawalpindi bench, which dismissed the reference on October 27, 2014. The matter was then brought before the Supreme Court.
The Supreme Court held that, in the absence of explicit legislative language granting retrospective effect, provisions of the ITO 2001 could not be applied to assessments governed by the repealed ITO 1979.
The judgment focused on that a taxpayer’s substantive rights and liabilities are determined under the law applicable to the relevant assessment year and cannot subsequently be increased through later legislation.
The court consequently declared the penalties imposed under Sections 182, 184 and 186 of the ITO 2001 unlawful and legally unsustainable. The civil appeal filed by the tax department was accordingly refused.
