Notices served on banks: objections raised by tax expert

A leading tax practitioner has raised serious objections to the notices served on the banks for recovery of short-deducted withholding tax, and late and non-payment of tax under Income Tax Ordinance 2001. A tax expert of banking sector told this scribe here on Friday that the monitoring of withholding taxes is being done since long so as to ensure that the duty passed on to the withholding agents is being performed in letter and spirit.
Recently, the powers under section 161 of the Income Tax Ordinance, 2001 are being used as a tool for generating revenue, and not as a medium for monitoring and enforcing the due collection of withholding tax.
In letter and spirit, monitoring can only be done during the financial period for which the Federal Board of Revenue (FBR) has a mechanism ie, examine the statements of withholding tax filed by each withholding agent, which are being filed monthly, quarterly and annually.
This is not the practice that is being carried out but a generalised notice for the past years is being sent to the major withholding agents eg, banks and multinational companies. Lump sum figures of all expenses claimed by the taxpayer are confronted by the tax officer and an explanation is called for furnishing the evidence of tax deduction. In case of a bank, the major amount falls under profit paid to account holders, which runs into billions (of rupees).
The expert said that the recent demand, created against banks, is on this account. It is not understandable as to why a bank, which is to withhold tax from profit paid to a third party, would not withhold the said tax and also not deposit it into the Federal Treasury? This can lead to disallowance of the expense u/s 21 of the Income Tax Ordinance 2011. Will any bank give such a favour to a third party and expose his income to taxation of 35 percent further tax under section 21 of the Ordinance? This is beyond comprehension that banks would not withhold tax and expose themselves to disallowance of the entire expense claimed, the tax expert said.
Moreover, the tax withheld is an advance tax, which is ultimately to be claimed by the person in whose name the tax is to be withheld, while filing his tax returns, and the FBR is bound to give credit of the same to him. The tax, if not withheld, should at first be collected from the person from whom the tax was to be collected and was to claim the same in his tax returns.
In fact, the tax, if not withheld and recovered later, will go to the credit of the person from whom the said tax was to be collected and thus can not be recovered from the withholding agent, provided the other person is not traceable or has absconded.
The provisions of section 161 of the Income Tax Ordinance 2001 do not allow FBR to call for information as if they were conducting an audit but only to levy tax if the default was definite and confirmed. In all the notices, so far issued, there is no definite default but only an inquiry on the basis of presumption. Thus, all the proceedings have no legal justification and a means for quick revenue generation, the expert added.