The Supreme Court of Pakistan has ruled that penalties imposed under the Income Tax Ordinance 2001 cannot be applied retrospectively to tax assessments completed under the repealed Income Tax Ordinance 1979, declaring such penalties unlawful and legally unsustainable.
A five judge larger bench headed by Justice Shahid Waheed also settled a conflict between two earlier Supreme Court rulings on whether amendments to tax laws could apply to assessments governed by the previous legislation.
The court held that the earlier 2009 ruling in the Eli Lilly Pakistan case represented the correct legal position, while the contrary view taken in the 2016 Islamic Investment Bank case was erroneous. The court said assessments completed under the repealed law must remain governed by that law, unless Parliament has clearly provided otherwise.
The case involved a taxpayer, Khadim Hussain, who had purchased a property in 1999 but had not filed a corresponding tax return. The tax authorities later initiated proceedings and issued an ex parte assessment under the repealed 1979 ordinance, adding Rs. 300,000 to his taxable income for assessment years 2000 to 2001 through 2002 to 2003.
The tax department also imposed penalties under the 2001 ordinance. However, the Commissioner of Income Tax Appeals subsequently deleted the penalties while maintaining the income addition. The Income Tax Appellate Tribunal and later the Lahore High Court upheld the position that the penalties were legally unsustainable.
The tax department then approached the Supreme Court, arguing that the penalties under the 2001 ordinance could be imposed. The larger bench rejected that position and refused the department’s appeal.
The court emphasized that in the absence of clear legislative language giving a tax provision retrospective effect, provisions of the 2001 ordinance could not be applied to assessments governed by the 1979 law.
The judgment said substantive rights and liabilities of taxpayers crystallize under the law applicable to the relevant assessment year and cannot later be increased through subsequent legislation. It further held that penal amendments or provisions increasing a taxpayer’s liability must generally apply prospectively unless Parliament expressly provides for retrospective application.
The ruling effectively settles the legal conflict between the two earlier judgments and establishes that later tax penalties cannot be imposed on assessments governed by an earlier tax law unless the legislation expressly provides for retrospective application.
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