Muhammad Saqib Raza
A recurring administrative issue involves the issuance of notices under Section 120(3) of the Income Tax Ordinance, 2001 [“the Ordinance”] to corporate taxpayers—whether operating under the Normal Tax Regime (NTR) or Final Tax Regime (FTR)—alleging non-filing of audited accounts or other deficiencies. These notices often culminate in orders passed under Section 120(4), declaring the return invalid. Such a declaration strips the taxpayer of Active Taxpayer List (ATL) status and subjects them to serious consequences, including withholding surcharges under Section 182A and penalties under Section 182(35) of the Ordinance.
This article critically examines Section 120 as a whole—its scope, procedural framework, applicability across NTR and FTR regimes, and the remedies available to taxpayers when an order under Section 120(4) is issued. It also considers situations where the Officer Inland Revenue (OIR) may have rightly invoked Section 120(4) of the Ordinance, and what fair recourse remains for a taxpayer facing consequences of an invalidated return.
Deemed Assessment under Section 120: Legal Structure and Subsections Explained
Section 120 outlines the concept of self-assessment and deemed acceptance by the Commissioner:
- Section 120(1): Where a taxpayer furnishes a complete return under Section 114(2), it is deemed as an assessment.
- Section 120(2): A return is complete if it complies with statutory form, attachments, and declarations.
- Section 120(3): If the return lacks any prescribed information (excluding understatements of tax), a notice can be issued to cure deficiencies.
- Section 120(4): If the taxpayer fails to comply with the notice, the return is treated as invalid as if not furnished at all.
This framework highlights that the Commissioner may only declare a return invalid if the deficiencies are substantive and compliance is not made within the allowed time.
Are Audited Accounts Always Required? A Comparison Between NTR and FTR
Rule 34(4)(e) of the Income Tax Rules, 2002 applies only where taxable income is computed—typically in NTR cases—requiring:
- Audited accounts;
- Reconciliation of accounting and taxable income.
In contrast, FTR taxpayers declare gross receipts (e.g., Section 154 – exports), where tax is final, and no taxable income computation is involved.
In 2016 PTD 1168 (Arshad Corporation), the Lahore High Court clarified:
“Where all of the taxpayer’s income is under final taxation, no audited accounts are required, and invoking Section 120(4) is without lawful authority”.
Consequences of a Section 120(4) Order in Both NTR and FTR Regimes
The invalidation of a return carries significant repercussions:
- Loss of ATL status under Section 2(1)(caa);
- Ineligibility for refunds;
- Higher withholding taxes as a non-filer;
- Mandatory surcharge under Section 182A upon late re-filing;
- Penalty under Section 182(35): Rs. 500,000 or 10% of tax chargeable (whichever is higher);
- Even after re-filing and surcharge payment, the taxpayer is classified as a “late filer” under the ATL regime, which continues to trigger higher rates of withholding tax.
In such cases, taxpayers may also explore an application under Section 159 of the Ordinance for obtaining an exemption or reduction in withholding tax rate. However, issuance of such certificate is subject to fulfilment of conditions prescribed under Section 159 of the Ordinance, and in particular, subject to the satisfaction of advance tax liability under Section 147 of the Ordinance.
Additionally, where a taxpayer misses the statutory deadline to file a return or respond to a notice—thus triggering Section 120(4)—condonation of delay under Section 214A of the Ordinance may be sought. The Federal Board of Revenue (FBR) has been empowered to condone time limitations for making any application or doing any act under the Ordinance, including acts by both taxpayers and tax authorities. The FBR may also delegate this power to Commissioners through Gazette notifications, offering another layer of procedural relief in justified circumstances.
Can the Officer be Justified? When Section 120(4) is Validly Invoked
While many Section 120(4) notices stem from procedural overreach, there may be cases where:
- Audited accounts were in fact required (e.g., NTR case with taxable income);
- The return was missing material annexures;
- There was failure to respond to a lawful deficiency notice.
Even in such situations, a taxpayer should not be left remediless. The law provides fair opportunity to:
- Re-file a complete return along with audit reports if applicable;
- Pay surcharge under Section 182A to restore ATL status (albeit as a late filer);
- Apply under Section 159 to request reduced withholding rate or exemption from excess deduction, subject to conditions and fulfilment of tax liability under Section 147;
- Explain reasonable cause to seek penalty waiver under Section 182/183 or remission policies;
- Seek condonation of delay under Section 214A where default was due to reasonable cause or hardship.
Appealability u/s 127: Emphasis on Residual Clause
Although Section 120(4) of the Ordinance is not explicitly mentioned in Section 127 of the Ordinance, the residual clause offers a wide appellate ambit:
“…or an order having the effect of enhancing the assessment or reducing a refund or otherwise increasing the liability of the person…”
Judicial precedents supporting broad interpretation include:
- 1999 PTD 4061 (Pak Saudi Fertilizer) – Residual clause held to be of omnibus nature.
- 2007 PTD 2088 – Held exemption withdrawal to be appealable.
- 2009 PTD 173 – Revision orders found appealable due to increase in liability.
- M/s Novel Travel (Pvt.) Ltd. [(2024) 130 TAX 61 (Trib.)] – Appeal against cancellation of exemption certificates u/s 159 held valid u/s 127/131 of the Ordinance.
- PLD 2006 SC 602 – Right to appeal deemed constitutional and rooted in Islamic justice. “Right of appeal is a substantive right; if not explicitly denied, it must be inferred and applied reasonably.”
Multiple Remedies Available for the Taxpayer: Strategic Overview
Whether the 120(4) of the Ordinance order is right or wrong, the taxpayer has the following recourses:
- Section 127 – Appeal to CIR (Appeals):
- Citing the residual clause if consequences involve penalties, ATL loss, or increased liability.
- Section 131 – Appeal to ATIR:
- Where CIR(A) rejects to entertain appeal on jurisdictional grounds or direct appeal to ATIR as section 131 (1) covers “any order passed by an Officer of Inland Revenue or Commissioner or Chief Commissioner or Board”.
- Section 122A – Revision by Commissioner:
- Where appeal is time-barred or to seek equitable correction.
- Voluntary Compliance and Surcharge (182A):
- Where default is factual, taxpayer can regularize return by refiling and paying nominal surcharge.
- Application under Section 159:
- To seek reduced rate or exemption from excessive withholding after being excluded from ATL. This certificate is subject to satisfaction of statutory criteria and advance tax payment obligations under Section 147.
- Condonation under Section 214A:
- For delay in filing, application, or response, the taxpayer may seek condonation from the FBR or delegated Commissioner, especially where delay results in adverse legal consequences.
Conclusion
Section 120 of the Ordinance is a powerful tool, but its exercise must remain legally anchored. Audited accounts are compulsory for NTR taxpayers but not for those under FTR. Officers must assess regime status before invoking Section 120(3)/(4) of the Ordinance. Even when correctly invoked, the law must provide reasonable redress for taxpayers.
The collective judicial wisdom from Arshad Corporation, Pak Saudi Fertilizer, 2007 PTD 2088, 2009 PTD 173, M/s Novel Travel (Pvt.) Ltd. [(2024) 130 TAX 61 (Trib.)], and PLD 2006 SC 602 affirms that Section 127’s residual clause ensures access to appeal where liability increases, whether directly or indirectly.
No taxpayer—whether NTR or FTR—should be penalized without legal recourse. Section 120(4) of the Ordinance must be enforced with procedural discipline and balanced with due process. Where ATL exclusion has long-term financial consequences, Section 159 of the Ordinance of the Ordinance may provide further relief through customized withholding arrangements, subject to the fulfilment of tax obligations including those under Section 147 of the Ordinance and where default stems from procedural delay, Section 214A of the Ordinance offers an important remedial framework to preserve substantive taxpayer rights.
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The writer, tax & corporate consultant, is Advocate High Court