Question

Find me case laws on withholding tax where taxpayer failed to deduct

Answer 1

Several landmark case laws and legal principles in Pakistan establish that a taxpayer who fails to deduct withholding tax (Tax Deducted at Source - TDS) under the Income Tax Ordinance, 2001, is personally liable to pay the amount of tax, along with default surcharge and penalty. 

Below are key case laws, primarily from Pakistani courts (under the Income Tax Ordinance, 2001), where taxpayers failed to deduct tax.

Pakistani courts have addressed various aspects of withholding tax failures. Case law highlights that taxpayers can be held personally liable under Section 161 for failing to deduct tax, as seen in Commissioner Inland Revenue vs. Islam Steel Mills & Others. The onus is on the taxpayer to prove non-deduction was justified.

Failure to deduct can also lead to the disallowance of related expenses under Section 21(c), according to a Sindh High Court ruling (Suit No. 330, 358 & 359 of 2017). Regarding the timing, the Islamabad High Court clarified in Commissioner Inland Revenue vs. Telenor LDI Communications that withholding tax is due upon actual payment, not just when an expense is recorded. 

There are exceptions, such as when a valid exemption certificate is presented or when a Double Tax Treaty exempts the payment from taxation. While a deductor may not have to pay the tax again if the payee has already paid it, they may still be liable for default surcharge.