Collection of withholding tax: Footwear manufacturer fails to defy notice

LAHORE: A footwear manufacturer failed to defy a show-cause notice regarding collection of withholding tax. The taxpayer contended that the notice issued by the taxation officer was flawed as it did not identify the specific parties from whom tax was allegedly not deducted. Without these details, it said, the tax demand was baseless and unfair.

The department argued that once it was established that the taxpayer had made payments subject to withholding tax, the onus of proof shifted to the taxpayer to demonstrate compliance.

The highest appellate forum held that the tax demand issued by the department was legally valid. It ruled that the taxpayer was obligated to disclose all relevant payments under section 161 of the Ordinance, even those payments on which tax was not withheld / deducted, and that reasons for non-deduction of tax thereon must be given.

Further, the forum held, citing the MCB Bank case that there must, at least initially, be some reason or information available with the Commissioner for him to conclude that there was, or could have been, a failure to deduct. That reason or information must satisfy the test of objectiveness, i.e., must be such as would satisfy a reasonable person looking at the relevant facts and information in an objective manner.

The threshold is not so stringent as to require “definite information” (using this term in the sense well known to income tax law), but it is also not so low as to be bound merely to the subjective satisfaction of the Commissioner.

Moreover, the Court further held that it is only after the aforesaid threshold is crossed can the tax officer issue a notice under Section 161 of the ITO and the burden of proof shifts on the taxpayer to show that he or she is not in default.

The forum maintained that the proceedings conducted by the tax officer were not a fishing expedition, and that the threshold / test mentioned above has been met. As such, the Honourable SCP held that the tax demand raised against the taxpayer was well-founded and therefore, dismissed the appeal of the taxpayer.

Copyright Business Recorder, 2025