An important issue has been decided at the High Court and Supreme Court level related to income tax refunds which we would like to highlight for the common benefit of large number of taxpayers.

Tax Reference No. 48 of 2011 in The Lahore High Court Multan Bench and Civil Petitions No.283-L to 286-L of 2018 in Supreme Court of Pakistan have been discussed hereunder. The issues settled through these judgments are as follows:

  1. when refund becomes due for the purpose of additional payment for delayed refund? and
  2. whether the application for refund u/s 170(4) is obligatory or not?


Reference applications filed in the High Court by tax department against the decisions of Appellate Tribunal Inland Revenue (“Appellate Tribunal”), concluding that refund becomes due on the date when order under Section 120 is taken to have been issued by the Commissioner.  The operative part from the order is reproduced for ease of reference: –

 “11. Cumulative reading of above shows that in terms of section 170(4) the Commissioner is duty bound to issue refund within 45 days of receipt of application, but under section 170(3)(c), even no refund application is required, for him to refund any amount overpaid after adjustment if any. In other words, the refund in this case was “due” for the purpose of section 171(1) on the date of order treated to have been made and after lapse of three months from the said date, the compensation was due. Section 171(2) relied upon by the Department does not vitiate the right of compensation as elaborated above. The Department has failed to appreciate the fact that section 171(2) is creating a legal fiction for certain specific “refund due” in section 171(1) and “a refund shall be treated as having become due “[section 171(2)] are not synonymous. The first deals with “refund” due on happening of an event, in this case the movement order under section 120 creating refund comes into existence. In the second situation a refund shall be treated as having become due i.e. when it was not otherwise due. Had this not been the case, there was no need to provide legal fiction as elaborated in detail in earlier paragraphs.”

Following questions of law framed and decided by the Court.

“1. Whether on the facts and in the circumstances of the case, learned Tribunal was justified to dismiss departmental appeal and hold that refund becomes due on the date of deemed assessment u/s120 of the Income Tax Ordinance, 2001 for the purpose of additional payment for delayed refund?

  1. Whether on the facts and in the circumstances of the case learned Tribunal was justified to hold that application for refund u/s 170(4) is not obligatory while interpreting the word “may” in sub-section (1) of section 170 of the Income Tax Ordinance, 2001?
  2. Whether on the facts and in the circumstances of the case, the learned Tribunal was justified to ignore the provisions of clause (c) of sub-section (2) of section 171 of the Income Tax Ordinance, 2001 which provides that a refund shall be treated as having become due on the date the refund order is made?”

The department’s Counsel argued that filing of an application, under Section 170, for issuance of refund is mandatory; Refund could be issued, only on Commissioner’s satisfaction that tax to be refunded was overpaid; refund claimed in a return is always subject to certain verifications and has to be issued through an order within stipulated time.

The respondents opposed the arguments by submitted that word “may” is used in sub-section (1) of Section 170 of the Ordinance, which makes the application for refund as optional. He emphasized that the order under Section 120 is an order for all purposes of the Ordinance including issuance of refund.

The court discussed that that a refund, under the Ordinance, is required to be paid within three months from the date it becomes due. If due refund is not paid within three-month, clock for ‘additional payment of delayed refund’, at the rate of 15% per annum, shall start ticking and would stop on the date of its payment. However its proviso, which has overriding effect, says that where there is reason to believe that the refund claimed by taxpayer is not admissible to him, the time shall not start running after three months unless investigation of the claim is completed and claim is either accepted or rejected. In other words, refund does not become due merely on its claim in the return or on filing of application for refund, if Commissioner believes, for reasons, that it is not admissible as claimed.

Subsection (2) of Section 171 envisages three eventualities when refund shall be treated as having become due.

First, when a dispute between the taxpayer and department is resolved in appeal and refund becomes payable as a consequence; the date when such order is received by Commissioner.

Second; on the date of order by Commissioner passed under section 122A.

Third situation is general in nature, it deals with remaining eventualities like; when order under section 120 is taken as issued by the Commissioner and it is not subjected to appeal or revision. In such case, the important words used by Legislature in clause (c) to subsection (2) of section 171, i.e., ‘on the date the refund order is made’, would clinch the controversy. Making of an order necessarily requires conscious application of mind and is to be related to the words, ‘reason to believe’ that claimed refund is not admissible. It is important to point out that, under scheme of the Ordinance, a complete return filed is taken as an assessment order issued by Commissioner, through operation of law and without application of mind.

While reviewing section 120, it was discussed that section 120 reveal that assessment, under this section, is taken to have been made of ‘tax due’ and not of ‘refund due’. Whatever is declared and concluded as ‘taxable income’ in a complete return is taken as order made by Commissioner, without application of his mind. In fact this order, by operation of law, is passed without even a glance by Commissioner on the return, in physical or digital form.

The Court concluded that refund could not be treated as due on issuance of order, under Section 120, by Commissioner through operation of law.

Further, the Court remarked that we are not convinced by the arguments of learned counsel for the respondents that word “may” used in subsection (1) of Section 171 makes filing of application for refund as optional. The word “may” is used for applying to the Commissioner for refund within two years. It appears that option to apply for refund in two years is given for the reason that taxpayer can also opt for adjustment of refund against his future tax liability or for adjustment against demand under other taxing statutes. The word “shall” used in subsection (2) not only makes filing of application for refund as mandatory but the application has to be in the manner and in the Form as prescribed by the Rules. It is incumbent upon the Commissioner, under subsection (3), to satisfy himself that tax was overpaid and he is obliged to reduce the payable refund by adjusting the tax payable under this Ordinance and under other statutes.

The Court held that Commissioner is bound under subsection (4) of section 170, to make a refund order within sixty days from receipt of application for refund. His inaction is made appealable under subsection (5). On expiration of sixty days, a negative order is presumed to have been passed. In case appeal is accepted, against the inaction, and refund is determined by Appellate Court, the refund shall be taken as due on the date when sixty days expired from receipt of application for refund. Courts would not allow the department to take advantage of its own inaction within the stipulated period of sixty days.

After discussing the above, the Court decided the case in the following words.

“9. For the reasons discussed above, we do not agree with the interpretation and decision given by Appellate Tribunal. Our answer to the questions of law, supra, is in “Negative” i.e., in favour of applicant department.”.


Almost similar question also came before Supreme Court of Pakistan in Civil Petitions No.283-L to 286-L of 2018 on an appeal from the order of Lahore High Court, Lahore dated 21.11.2017, passed in Income Tax References No.304 to 307 of 2014.

The question before Supreme Court to determine was the date when tax refund becomes due to the petitioner (taxpayer) under the Income Tax Ordinance, 2001 (the “Ordinance”) for the purposes of Additional Payment or compensation for delayed refund.

Brief facts are that the petitioner filed tax returns along with refund applications for Tax Years 2004 to 2008. The refund applications were taken up under section 170 and rejected by the Assistant Commissioner Inland Revenue, Regional Tax Office, Lahore on 23.09.2010. On appeal filed by the petitioner before the Commissioner Inland Revenue (Appeals) [CIR (Appeals)],

Lahore the case was remanded to Taxation Officer on 15.02.2011 for a fresh decision. The Deputy Commissioner Inland Revenue (DCIT) decided the matter on 22.03.2013 granting refund to the petitioner, as well as, additional payment (compensation) for delayed refund w.e.f 15.02.2011 i.e., the date when CIR (Appeals) decided the appeals and remanded the matters to the DCIT.

Petitioner, aggrieved of the date of the refund due, preferred appeals before CIR (Appeals) which were dismissed on the question of jurisdiction; holding that no appeal lay against an order under section 171 of the Ordinance.

The petitioner filed an appeal before the Appellate Tribunal Inland Revenue (ATIR) which was allowed vide order dated 12.09.2014, granting Additional Payment (compensation) to the petitioner for delayed refunds from the date of the deemed assessment under section 120 of the Ordinance when the petitioner had filed the annual income tax returns for the relevant tax years. The tax department assailed the order before the High Court by filing appeals which were allowed vide impugned order dated 21.11.2017 holding the date of the refund due in terms of section 171(2)(a) to be w.e.f 22.03.2013 – the date when DCIT passed the refund order in favour of the petitioner.

The Supreme Court examined the relevant provisions of the Ordinance, in particular, sections 120, 170, 171 and the Explanation inserted in section 171(2) vide Finance Act, 2013, dated 01.07.2013 as follows:

Under the scheme of the Ordinance (Chapter X, Part VI) a taxpayer, who has paid tax in excess of the amount which is properly chargeable under the Ordinance, may apply to the Commissioner for the refund of the excess under section 170. The application for refund has to be in the prescribed form and verified in the prescribed manner and is to be made within three years of the later of the (i) assessment order (under section 120) issued by the Commissioner to the taxpayer for the tax year to which the refund application relates or (ii) the date on which the tax was paid. The Commissioner if satisfied that the tax has been overpaid by the taxpayer may do the following in a sequential manner: (i) apply the excess in reduction of any tax due from the taxpayer under the Ordinance. (ii) apply the balance, if any, to pay any outstanding liability of the taxpayer to pay other taxes and (iii) refund the remainder, if any to the taxpayer. The Commissioner is to decide the refund application within 60 days of the receipt of the application and decide the same after granting a hearing to the taxpayer. Any one aggrieved of the refund order or the failure of the Commissioner to decide the application within the specified time can file an appeal as provided in the Ordinance. Once the refund order has been passed which may entail cash refund or adjustment against pending liability as envisaged under section 170(3). Thereafter, if the refund is delayed and not paid to the taxpayer within three months of the date on which it becomes due, the taxpayer gets entitled to compensation at the rate of KIBOR plus 0.5 percent per annum of the amount of refund computed for the period commencing at the end of the three month period and ending on the date on which it is paid. Sub-section 2 of section 171 refers to dates which are treated to be the dates when the refund becomes due. Sections 170 and 171, therefore, provide a complete mechanism for claiming tax refund by a taxpayer. Such an application undergoes proper scrutiny and only upon satisfaction of the Commissioner is the refund order issued.

After discussing the above, the Court decided the case in the following words.

“7. In the present case, the applications for refund filed by the petitioner under section 170 were taken up by Assistant Commissioner Inland Revenue in the year 2010 and initially rejected. After remand of the matter by CIR (Appeals), DCIT passed refund order on 22.03.2013. The matter remained under litigation between the department and the taxpayer, and refund order was passed on 23.03.2013, rather than 15.02.2011, when the CIR (Appeals) simply remanded the matter to the DCIT to decide the same afresh. Therefore, the date of refund order passed by DCIT i.e., 22.03.2013 will be the date when the refund becomes due as per section 171(2)(c) [instead of section 171(2)(a)] as correctly noted by the High Court.

  1. For the above reasons, these petitions fail and are, therefore, dismissed.

 Summarizing both judgments above, it has been decided that that:

  • refund order shall be treated as having become due on the date the refund order is made by the Commissioner; and
  • filing of application for refund under section 170 is mandatory.

Please contact us in case any clarification or discussion is required in this regard.


KCO Commentaries on Important Case Laws Related to Income Tax Refunds

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