The Appellate Tribunal Inland Revenue (ATIR) Lahore has ruled that undisclosed foreign assets or investments held abroad in previous years cannot be subject to taxation if the time limitation for those past tax periods has expired. This significant decision provides clarity for taxpayers who may have inadvertently omitted foreign assets from their tax declarations in prior years.
The ATIR issued this order in favor of a taxpayer who did not disclose their foreign bank accounts in their income tax returns for the tax year 2022. The case revolves around foreign bank accounts held in Switzerland by the taxpayer, who had not declared these accounts in their tax filings. The ruling emphasizes the importance of adhering to statutory time limits for taxation and reinforces protections for taxpayers under existing tax laws.
The taxpayer, an individual, was identified through information provided by the Organization of Economic Cooperation and Development (OECD). The OECD reported that the taxpayer held foreign bank accounts in Switzerland, with balances amounting to $826,474.09 and $1,357,827.3. When converted to Pakistani Rupees, these amounts totaled approximately Rs132,235,854 and Rs217,252,368, respectively.
Upon receiving this information, the assessing officer issued a notice under Section 176 of the Income Tax Ordinance 2001. The taxpayer responded by explaining that the omission to declare these foreign accounts was unintentional, citing that the accounts had not been actively operated for over 12 years. The taxpayer further clarified that they were the owner or beneficiary of a share in the bank accounts but had not made any fresh deposits or investments into these accounts during the relevant years, particularly from the tax years 2008 to 2022.
The crux of the taxpayer’s argument was that the funds in these accounts were the result of past and closed transactions, and therefore, could not be taxed in subsequent tax years. The ATIR found merit in this argument, stating that there was no justification for the assessing officer to apply Section 111 of the Income Tax Ordinance to tax these amounts retrospectively.
In its detailed order, the ATIR emphasized that no fresh deposits or investments had been made by the taxpayer during the period from June 30, 2008, to June 30, 2022. As a result, the tribunal ruled that there was no legal basis for the assessing officer to invoke Section 111 and add these amounts to the taxpayer’s income for the tax year 2022.
The ATIR also reviewed a judgment from the Lahore High Court (LHC), cited as 2015 PTD 1823, which was referenced by the tax department. The LHC judgment pertained to the formation of an opinion and the determination of the date of discovery for the purposes of making additions under Section 122, read with Section 111(1). However, the ATIR determined that this judgment was not applicable to the current case, as the issues at hand were related to the retrospective application of tax laws that had been amended in 2018. The tribunal ruled that the taxpayer’s vested rights, which had already accrued before the 2018 amendment, could not be overridden by the new law.
The taxpayer had filed their return for the tax year 2011 on November 27, 2011. According to the law in effect at that time, the Commissioner had a five-year window from the end of the financial year in which the assessment order was issued to amend the assessment. This limitation period, as stipulated by Section 122(2) of the Income Tax Ordinance, ended on June 30, 2017. Consequently, any notice issued after that date was deemed invalid by the ATIR.
Furthermore, the ATIR referenced Section 174 of the Income Tax Ordinance, which protects taxpayers from being required to produce records or documents after the prescribed period of six years following the end of the relevant tax year. This provision ensures that tax proceedings based on historical records must be initiated within the specified timeframe. The Finance Act of 2022 amended Section 174 by adding a proviso that exempts certain records from this limitation, but the ATIR determined that this amendment did not apply retroactively to the taxpayer’s case.
The ATIR also cited a precedent set by the Supreme Court of Pakistan in the case titled “Additional Commissioner IR vs. Eden Builders,” reported as 2018 SCMR 991. In this case, the Supreme Court held that amendments to Section 122(2) of the Income Tax Ordinance, made through the Finance Act of 2009, were not retrospective. Therefore, taxpayers who filed their returns before June 30, 2009, would be governed by the law as it stood before the amendment.
This precedent further reinforced the ATIR’s decision, as it established that statutory limitation periods are mandatory and cannot be altered retroactively. The tribunal concluded that the assessments completed under the old law should be governed by that law, as it existed before the 2018 amendments. As a result, the ATIR ruled in favor of the taxpayer, affirming that the assessments already completed could not be revisited under the amended law.
The ATIR’s ruling highlights the importance of adhering to statutory time limits in tax matters and provides clarity for taxpayers who may have inadvertently failed to disclose foreign assets. This decision reinforces the principle that taxpayers should not be penalized for past transactions that were completed under a different legal framework.
