Delayed refunds: Expert explains what constitutes compensation calculations

A leading Karachi-based chartered accountant has explained the compensation calculations for the ease of taxpayers seeking payment of delayed refunds from the date of refund orders in the light of the judgment of the Supreme Court of Pakistan.

Recently, the Supreme Court of Pakistan (SCP) held that where a refund order is made on an application under subsection (1) of Section 170, then for the purpose of compensation, the refund becomes due from the date refund order is made, and not from the date the assessment of income treated to have been made by the commissioner under Section 120. Hence, compensation will be calculated from the date of refund order.

Though decided now by the SCP, however, the case is of 2004 to 2008 when compensation was being paid whilst in 2020 taxpayers are pleading their cases to get assessed refunds.

A leading chartered accountant, Asif Kasbati, told Business Recorder that the Supreme Court in Civil Petitions No 283-L to 286-L of 2018 (on appeal against the LHC order dated 21.11.2017, passed in Income Tax References No 304 to 307 of 2014) in the case of Hamid Ashraf, etc v/s CIR) the compensation starting date issue was dealt with.

Highlighting his facts and history prior to the SCP, he informed the correspondent 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 CIR, RTO, Lahore, on 23rd September 2010.

On appeal filed by the petitioner before the CIR (Appeals), the case was remanded to taxation officer DCIR on 15 February 2011 for a fresh decision. The DCIR decided the matter on 22 March 2013 granting refund to the petitioner, as well as, additional payment for delayed refund (compensation) w.e.f 15 February 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.

The petitioner filed an appeal before the ATIR, which was allowed vide order dated 12 September 2014, granting Additional Payment (Compensation) to the petitioner for delayed refunds from the date of the deemed assessment under Section 120(1)(b) 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 November 2017 holding the date of the refund due in terms of Section 171(2)(a) to be w.e.f 22 March 2013 - the date when the DCIT passed the refund order in favour of the petitioner.

Earlier compensation meter started from 15.2.20 as per DCIR order and now as per LHC order from 22.3.2013, Kasbati emphasized.

Kasbati added about petition before the SCP that the question before the SCP is to determine the date when tax refund becomes due to the petitioner (taxpayer) under the Income Tax Ordinance, 2001 for the purposes of additional payment or compensation for delayed refund.

After hearing the parties, the SCP 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 1.7.2013.

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 (a) has to be in the prescribed form and verified in the prescribed manner and (b) 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.

The impression that deemed assessment under section 120, when the annual tax return filed under Section 114 shows a refund payable to the taxpayer, passes for a refund order, stands dispelled by the explanation to Section 171 inserted through Finance Act, 2013, which states as under: "Explanation.- For the removal of doubt, it is clarified that where a refund order is made on an application under subsection (1) of section 170, for the purpose of compensation, the refund becomes due from the date refund order is made and not from the date the assessment of income treated to have been made by the Commissioner under section 120."

For removal of any doubt and as a clarification, the explanation provides that for the purposes of compensation, tax refund becomes due from the date of the refund order and not from the date of deemed assessment under Section 120.

In other words, the mechanism of refund under the Ordinance, works on the basis of a refund order passed on an application for refund filed by tax payer and duly scrutinized by the commissioner, and is not payable simply on the basis of the deemed assessment under Section 120.

The scheme of refund provided under the statute overrides the deeming provision of Section 120. Deemed assessment under Section 120 is, therefore, not a substitute for a refund order.

It appears, as if the return of tax or refund by the exchequer to a taxpayer requires scrutiny by the commissioner and cannot be deemed to be an amount outstanding in favour of the taxpayer.

The taxpayer is free to apply for refund under Section 170, immediately after the filing of the tax return or the deemed assessment.

Section 170 provides a fast-tracked mechanism for refund as it specifies time for the passing of a refund order and the remedy of appeal in case of failure to pass any such order.

Other than this fast-track refund mechanism there is no scheme of automatic refund on the basis of the deemed assessment as is made amply clear by the explanation.

The explanation enjoys retrospective effect because its purpose is "removal of doubt" besides supplying necessary statutory "clarification."

However, the retrospective operation of the explanation shall not affect past and closed transactions where the benefit of refund and compensation has already been extended to the taxpayer on the basis of deemed assessment under section 120.

No Past and Closed transaction issue: The instant case pertains to pre-2013, it was argued by the petitioner that the tax refund became due from the date of the deemed assessment under section 120 of the Ordinance.

This argument is not available to the petitioner. Firstly, the case of the petitioner is not a past and closed transaction and secondly, the petitioner had moved a refund application under section 170 of the Ordinance which was processed and finally refund order was passed on 22.3.2013.

Kasbati added about the SC decision that in the present case, the applications for refund filed by the petitioner under Section 170 were taken up by ACIR in the year 2010 and initially rejected.

After remand of the matter by CIR (Appeals), DCIT passed refund order on 22 March 2013. The matter remained under litigation between the department and the taxpayer, and refund order was passed on 23 March 2013, rather than 15 February 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.