The Federal Tax Ombudsman (FTO) has ruled that the Federal Board of Revenue (FBR) cannot collect tax deposits during inquiry or monitoring proceedings without first determining tax liability through the legal assessment process, declaring such actions a case of maladministration and a violation of taxpayers’ rights.
In a significant decision, the Ombudsman directed the FBR to submit a compliance report within 45 days and implement corrective measures to prevent similar incidents in the future.
The case arose from a complaint filed by the owner of Noor Surgical Hospital in Abbottabad, who alleged that Inland Revenue officials recovered a substantial amount during proceedings conducted under Section 175C of the Income Tax Ordinance, 2001, without issuing any formal assessment or adjudication order.
During the proceedings, the FBR maintained that the payment was made voluntarily by the taxpayer during monitoring and inquiry activities and denied any coercion or unlawful recovery.
However, the Ombudsman observed that the tax department failed to produce any assessment order, speaking order, or documented determination of tax liability to justify the collection of the amount.
After examining the matter, the FTO clarified that Section 175C authorizes Inland Revenue officials to conduct inquiries, gather information, and monitor business activities, but does not empower them to collect taxes or recover revenue without first completing the statutory assessment process.
The ruling emphasized that investigative and monitoring powers cannot replace the legal procedures required for determining tax liability under the Income Tax Ordinance.
The Ombudsman further noted that the department did not conclude the proceedings through a formal order explaining the basis of the alleged liability or default after obtaining the deposit. The absence of a speaking order rendered the action legally unsustainable and contrary to principles of transparency, accountability, and due process.
Expressing concern over the increasing practice of obtaining “voluntary tax deposits” during inquiry proceedings, the FTO stated that such payments cannot serve as a substitute for proper tax assessments. The ruling warned that collecting deposits without legal determination of liability could undermine taxpayer protections and create an imbalance between tax authorities and taxpayers.
The Ombudsman held that Section 175C does not grant unrestricted authority to recover taxes outside the framework prescribed by law. Any amount collected without a subsequent legal determination of liability may amount to unauthorized recovery.
As a result, the FTO concluded that the conduct of the tax officials constituted maladministration under the Establishment of the Office of Federal Tax Ombudsman Ordinance, 2000.
The Ombudsman recommended that the FBR initiate a fact-finding inquiry into the circumstances surrounding the collection of the deposit and determine responsibility for any misuse of authority. It also directed the tax authority to ensure that no retaliatory action is taken against the complainant except in accordance with the law.
Additionally, the FTO advised the FBR to develop clear and transparent guidelines governing voluntary tax deposits during monitoring and inquiry proceedings to protect taxpayer rights and ensure compliance with legal requirements.
The ruling is being viewed as a landmark decision reinforcing taxpayer protections and reaffirming that tax collection must be based on due process, formal assessment, and documented determination of liability before any recovery can be made.
