Monthly Archives: October 2025

Among the myriad provisions of Pakistan’s tax laws, perhaps one of the more important is Section 138 which deals with enforcement and recovery from noncompliant taxpayers. Under the Income Tax Ordinance, 2001, Section 138 gives legal backing to the tax authorities for recovery of dues through a coordinated mechanism. This article covers Section 138, tax recovery under section 138, and consequences thereupon with due reference to Section 138 of Income Tax Act penalty on dishonor. Whether you are a citizen, taxpayer, employer or a tax consultant, it’s important to have sufficient knowledge about Income Tax Ordinance’s Section 138.  

 

What is Section 138 of the Income Tax Ordinance? 

The provided text outlines the legal provisions for the recovery of tax dues by a commissioner from a taxpayer, as well as related procedures. Here’s a summary:  

Notice of payment (Section 138): The Commissioner has power to serve a notice on a taxpayer in the prescribed form and requiring such person to pay within such time as is specified in the notice mentioning therein and forthwith all moneys outstanding under this Act. 

Recovery Methods: In case the taxpayer could not pay within the specified or extended period, the Commissioner assesses him on the amount and can recover it in any of these ways: 

Attachment and Sale: Attaching of the movable or immovable property (of the taxpayer) followed by its sale. 

Receiver Appointment: Appointment of a receiver to take over and manage the taxpayer’s assets. 

Arrest and Detention: The jailing of the taxpayer for six months. 

Other modes: Additional recovery methods as specified under the Sales Tax Act, 1990. 

Powers of Commissioner: The Commissioner shall have the like powers as are vested in a Civil Court under the Code of Civil Procedure, 1908, for the purpose of enforcing the recovery of any amount due under a decree. 

Rule Making: The Board may promulgate rules governing the procedure for payment and collection of taxes. 

Recovery by District Officer (Revenue) (Section 138A): – 

The Commissioner may also transmit to the District Officer (Revenue) in any district where the taxpayer resides, carries on business or owns property a certificate setting forth the amount of tax due. 

The amount shall be recoverable by the District Officer as if it were arrears of land revenue, with the powers of a Civil Court under the Code of Civil Procedure, 1908. 

Estate in Bankruptcy (Section 138B): 

A taxpayer’s tax debt becomes part of the bankruptcy estate if they become bankrupt. 

The estate’s tax liability is treated as ordinary and necessary business expenses and given priority over the claims of other creditors. 

This structure provides strong tax-recovery measures, such as escalating notices, property actions, and incarceration, and cooperation with revenue departments or bankrupt estates. 

 

The Purpose of Section 138 

The main objective behind this provision is to enable speedy recovery of tax arrears so as to avoid undue delays that will disturb the financial position of the Government. When tax-to-GDP ratios continue to be below targets in these tax systems, measures such as this discourage intentional non-payment and encourage willing compliance. 

The CIR can serve as a notice under Section 138 in a prescribed form requiring payment within a set period often between 15 and 30 days, corresponding to the facts of each case. This notice is a formal wakeup call that taxpayers now have an available opportunity to resolve liabilities before harsh actions follow. The idea is deterrence: by setting the stages of recovery section 138 acts as a spur to do the needful and protects against arbitrary enforcement.  

Secondly, the provision of Section138 is in harmony with above broader fiscal reforms including amendments made by the Finance Act, 2024 on such fiscal reform brought through the Tax Laws (Amendment) Ordinance, 2025 as well. These amendments stress quick recoverability of taxes after assessment, over-riding the interregnum of period consumed in appeal proceedings or court stay in some cases. This development emphasizes FBR’s willingness to modernize tax recovery and makes Section 138 a pivot of modern-day tax recovery by way of Section 138. 

 

How Tax Recovery Works Through Section 138 

Tax recovery through Section 138 is a multi-tiered process, empowering the CIR with civil court-like authority under the Code of Civil Procedure, 1908 (CPC). Here’s a step-by-step breakdown: 

Issuance of Demand Notice: 

CIR serves as a notice under sub section (1) of section 138, addressing the issue of tax amount and time limit. This is the first line of defense, often sent via registered post or email for traceability. 

Non-Payment Outcome: 

If unpaid within the timeframe (or extended period granted by the CIR), sub-section (2) activates recovery modes 

Attachment and Sale of Property: 

The movable/immovable property can be attached and sold; it is in the nature of decree execution under Order 21 CPC. 

Garnishee Proceedings: 

Third party debtors of the taxpayer (e.g. banks) are ordered to pay directly to the FBR. 

Arrest and Detention: 

In extreme cases, the taxpayer can be arrested and detained for up to six months, akin to civil imprisonment for debt recovery.  

Delegation to District Officer (Revenue): 

A supplementary provision under Section 138A of the Act, whereby the CIR may certify dues payable by a person (i.e., as arrears from land revenue) to be collected by the district officer who would attach agricultural land or other district level properties. 

 

The author suggests that Section 138’s recovery process should be based on due process, with coercive means halted during appeals to the Commissioner. After 2025 amendments, taxes can be recovered on High Court or Supreme Court judgment. 

 

Consequences of Defiance: 

Though Section 138 is purely a civil one, its non-compliance can have grave consequences, i.e. Section 138 of Income Tax Act punishment. The term ‘Income Tax Act’ used therein is consistent with the Ordinance and that the `punishment’ is one of recovery and not an independent criminal penalty.  

Civil Penalties:

The most direct “punishment” is asset attachment and sale, which can cripple businesses. For instance, failure to pay can result in bank account freezes or property auctions, leading to financial distress. 

Imprisonment:

Under clause (2)(c), the power is given to detain the person for six months. It is not a criminal prosecution, but a statutory civil relief, for the recalcitrant defaulter. The courts have supported this, even in the one that came before the ATIR emphasizing proportionality. 

Compounding and Interest:

So long as there is an overdue tax, the default surcharge under Section 205 (up to 1.2% per month) compounds the liability. Furthermore, fees for recovery procedures are an additional burden. 

Though, Section 138 of the Income Tax Act penalty is a last resort. Data from the FBR shows that thousands of recovery notices are issued every year, but many are resolved by settling. An FBR notification dated 2023 read, had withdrawn premature notices which were at the stage of appeal, referring to Supreme Court precedents (such as 2018 SCMR 939), demonstrating judicial control in curbing overreach. 

 

Integrating Section 138 into Your Tax Strategy 

To avoid the pitfalls of Section 138, proactive compliance is key. Businesses should: 

• File returns in time and comply with orders of assessments. 

• Apply for extensions or CIR installment plans before notices become enforced. 

• Maintain accurate records to challenge erroneous demands during appeals. 

• Seek advice from tax consultants on maximizing exemptions or reliefs under the Ordinance. 

Recent improvements, such as electronic notices through the FBR Iris portal, have made the task of keeping track much easier. If Section 138 is understood as a compliance tool and not perceived simply as a weapon, taxpayers will be able to fit it comfortably into their fiscal planning. 

 

Conclusion 

Thus, the purpose of Section 138 in IT Ordinance is very simple- to double lock tax recovery under Section 138 to know that the stream resides with Pakistan. From providing demand notices to the prospect of detention, it gives officers an arsenal of enforcement tools that are in line with procedural fairness. Section 138 of the Income Tax Act punishment is a reminder to us that we have no choice on tax, but there are plenty of places to take refuge. 

 

 At the time that Pakistan’s tax-plunged terrains shift toward new horizons, compliance is not just submitting returns. But ensuring what is submitted is precise and real! With the filing deadline for Tax Year 2025 just around the corner on September 30, a new glitch has arisen. As per details, the PBC has reported a ‘flag error in tax credit calculation’ at the FBRs IRIS portal. It has been blocking urgent calls from the business community as well. This red flag raised by the Pakistan Business Council (PBC) demonstrates a broader picture of tax computation issues in Pakistan. It could cause filing delays and inflated liabilities for thousands. You are not the first to wrestle with a deduction of conundrum when it comes to making donations or paid contributions to your pension. Let’s break it down. 

 

What is the IRIS Portal, and Why Does It Matter? 

IRIS, The E-Portal Backbone of Pakistan’s Tax System Federal Board of Revenue (FBR) has introduced its digital backbone for taxpayers, i.e., IRIS. Introduced to simplify e-filing, it enables individual taxpayers, association of persons (AOP) and companies to file income tax return. Also, wealth statements and other documents electronically through a single portal. Debuts for Tax Year 2025 with IRIS 2.0, where new technology would allow us all to file seamlessly with simpler forms and real time verifications. As you learn every day from machines, it is always safe to trust machines but that never happens without more than a few prologue hiccups. 

IRIS handles all salaried tax slabs to complicated deductions and is crucial for over three million working filers. But when it’s not perfect, they percolate through. An ostensibly simple thing turns into a nightmare. This is where the PBC flags math error on FBR’s IRIS Portal falls under legal scan, not only a technical bug. 

 

The Core Issue 

The PBC wrote to FBR Chairman Rashid Mahmood on October 8, 2025, to alert him that a serious flaw has been discovered in processing of tax credits under Sections 61 and 63 of the Income Tax Ordinance, 2001 through IRIS. For the most part, this is due to the way that IRIS calculates credits donations at Section 61 and pension fund contributions of an approved variety in section 63. These sections provide that a taxpayer is entitled to claim credits for payments equal to a percentage of the “total tax assessed” explicitly including the super tax surcharge under section 4C. 

IRIS is completely unwilling to have anything to do with that surcharge when calculating its return. This discrepancy translates into filers receiving less than what is owed under law, due to above-penalty liabilities and delays in filing. The PBC notes that these hits the “highly skilled professionals, generous donors and active investors in voluntary pension funds” hardest of all, including member companies. That is not a minor oversight with the filing deadline ready to slam shut; but a barrier to compliance. 

 

 

Tax Calculation Issues 

The tax calculation mistake in IRIS has been the bane of the system and bodies like the Karachi Tax Bar Association have over the years raised alarm. Filers faced lower rates on contract receipts in 2022 pursuant to section 153 (at 7% versus 7.5%) and wrong taxes levied on gains. It is from immovable property under section 37(1A) along with an erroneous cap on Bahbood Certificate yields under the second schedule. Fast forward to 2025 and some of the same difficulties persist: IRIS does not set aside donation credits against surcharges under section 60 and 4AB, treats some amounts raised as final tax with no entitlement to adjust. 

For everyone from salaried workers to businesses that pay taxes, these are bugs that lead to manual overreactions. One that may be more expensive in filing season. FBR’s response? Most of the time with no extensions even after pleading.  

Unpacking the Reasons for Errors in Tax Calculation 

These are some of the reasons taxes could be wrong, especially where tax is calculated by using a computerized system:

• Software Failures/Coding Errors: The portal algorithm may be making an error in new tax law changes or credit data. 
• Insufficient Synchronized Data: It may be that if the taxpayer’s complete data is not synchronized, credits cannot be computed correctly. 
• Updates of Law & Regulations: Pakistan’s tax laws and finance acts get updated from time to time. IRIS: Absence of regularly up-to-date information on IRIS may lead to obsolete calculations. 
• User Entry Error: Taxpayers can input the data wrong or forget to populate a field, which is then processed through the system incorrectly. 

These are not “bugs” as errors in tax calculation. Instead, they’re the difference between the policy intent and what gets implemented digitally. These days, fewer businesses will be able to rely on that period. “Filers lose immediately without 90-day grace periods after fixes,” as PTBA noted in 2023. 

 

How to Mitigate the Impact: 

Do not let these obstacles get in your way. Just in case you were also wondering, here is how to deal with PBC flags error in tax credit calculation on FBR’s IRIS Portal:

• Double-Check Inputs: Utilize FBR’s official salary tax calculator for a double-check of the form before applying in order to identify any discrepancies. Check the add on charges manually for Section 61/63 claims. 

• Get Professional Help: Hire a tax professional who understands IRIS overrides. KTBA and PTBA members guide you on what to avoid. 

• Document Everything: Ensure to screenshot the errors you are facing and maintain a record of your communications with FBR helpline (051-111-772-772). If delayed, refer to the appeals to the PBC letter. 

• Monitor Changes: We will wait for advance notices from FBR as well as IRIS FAQs and changes for applying patches. The system is still operational, as of October 2025; however, maintaining vigilance is important. 

• Advocate for Change: Support PBC and KTBA petitions demanding systemic changes such as live error alerts and beta testing of updates. 

 

CBM Accounting Playing a Major Role: 

CBM Consultants plays a major role in addressing and rectification of errors, FBR’s IRIS portal regarding tax credit calculations. Our professionals can: 

• Detect and Confirm Mistakes: Companies can reconcile system-generated tax numbers with hand calculations to identify inconsistencies in the calculation of tax credit. 

• Assist in Filing Corrections: We assist filers in completing amended returns or adjustments for the correct amount of taxes due, as well as any credits to which they are entitled.  

• Offer Professional Advice: Our experts understand the provision of the Income Tax Ordinance, 2001. We assist them in interpreting various sections as well as their applications for credits. 

• Liaise with FBR: Qualified accountants can approach the tax department online to inform about a bug and request an amendment. 

• Educate Taxpayers: Clients can learn how to input data into IRIS correctly, which means fewer user errors that lead to tax shortfalls. 

In short, CBM Consultants serve as a bridge between taxpayers and FBR. It ensures accuracy, compliance, and timely resolution of digital tax computation errors. 

 

Conclusion: 

The PBC flags an error in tax credit calculation on FBR’s IRIS Portal is more than a glitch. It reveals systemic issues in tax calculations that Pakistan. Also, it undermines trust in our digital tax system. Reasons for errors in tax calculation; the onus is upon FBR to also focus. Taxpayers should have a portal that facilitates, not hinders, compliance. 

Few provisions of Pakistan’s tax laws evoke fear as much as Section 111 of the Income Tax Ordinance, 2001 (ITO). The provision of this section is the FBR’s potent mechanism to investigate any unexplained income, assets or expenditure; in sum, validation that all rupees earned and all rupees spent are related to what has been declared. Whether you are a salaried employee, business owner or an overseas Pakistani who sends money back to your country of origin, knowing what Section 111 is and how it works is not only recommended but necessary to save yourself from potentially expensive surprises. 

Think about this: You filed your return for the year, reporting a modest salary and some savings. And to and behold, a notice under section 111(1) lands within the tax collection agency’s IRIS portal, asking where you bought your property or from where you got the (large bank) credit. In this post, we unravel some of Section 111 of Income Tax Ordinance, help you understand FBR notice 111(1), and discuss the horrific implications if you don’t respond with a justified response. Knowledge here is not just power; knowledge is protection.  

 

What is Section 111 of Income Tax Ordinance? 

At base, Section 111 is aimed at “unexplained income or assets.” Embedded in the Income Tax Ordinance, 2001 as Chapter VIII, this clause authorizes Commissioner Inland Revenue to deem any undisclosed or insufficiently explained financial transactions as taxable income. This isn’t about “punishing” success but preventing income from sneaking through the tax net.  

This section outlines the tax treatment of unexplained income or assets under specific conditions: 

Scope of Unexplained Income or Assets:

If a person has: 

• Amounts credited in their books of account, 
• Investments, money, or valuable articles owned, 
• Expenditure incurred, or 
• Concealed income (e.g., suppressed production, sales, or taxable receipts), and they fail to provide a satisfactory explanation about the nature and source of these; the amounts are taxable. 

Taxation Rules: 

• Unexplained amounts (e.g., credited amounts, investments, expenditures) are included in the person’s income under “Income from Other Sources” to the extent they are not adequately explained. 
• Suppressed production, sales, or taxable receipts are included under “Income from Business.” 
• Agricultural income explanations are accepted based on provincial agricultural income tax paid. 
• For assets or expenditures in Pakistan, the amount is taxed in the year it relates to. For foreign assets or concealed income, it is taxed in the year prior to discovery by the Commissioner. 
• If the declared cost of an investment or expenditure is less than the reasonable cost, the difference may be included under “Income from Other Sources.” 

Exemptions and Clarifications: 

• Foreign exchange remittances up to 5 million Rupees per year through normal banking channels (e.g., scheduled banks, money service bureaus) are exempt if supported by a bank certificate. 
• Income subject to final tax cannot be credited beyond imputable income unless the excess is reasonably attributed to business activities, supported by audited financial statements. 
• No separate notice is required if the taxpayer is already confronted with the unexplained amounts through a notice under section 122(9) of the Ordinance. 

Administrative Provisions: 

• The Board may establish rules for this section under section 237. 
• The “year of discovery” for foreign assets or income is defined as the year the Commissioner issues a notice requiring explanation. 

 

When Does the FBR Issue a Notice Under Section 111(1)? 

FBR notice 111(1) is a formal trigger, a show-cause, demanding an explanation of what and from where the notice came from. It’s usually sent electronically through the IRIS system, although in the past it has come at some point within six years of the relevant tax year, but recent changes have narrowed timeframes.  

Common triggers include: 

• Bank Credits or Investments: Deposit or stock purchase in excess of income. 

• Property or Vehicle Acquisition: Assets unexplained Sensitive asset values with no associated documented income. 

• Expenditures: Overspending on education, travel, or gifts not covered by declared funds. 

• Wealth Statement Mismatches: When your annual wealth reconciliation contradicts your account holdings. 

In the case of overseas Pakistanis, remittances through normal banking channels are usually excluded under section 111(4), subject to production of bank encashment certificate. But if the amount of money is over 5 million PKR, or does not have supporting papers, then it may still be subject to questioning. The notice identifies the tax year, the sum at issue and provides a deadline, typically 30 days, to respond. 

The latest circulars of FBR, particularly dated 1st December 2024, lay emphasis that a separate Notice under Section 111(1) is required to be issued before amendments by way of assessment are made in accordance with Section 122. Skipping this step? Courts, the Lahore High Court and Supreme Court have both voided these measures to safeguard the rights of the taxpayers.  

 

What Happens If You Can’t Explain Your Source of Income? 

Here’s where things get serious. If you failed to meet notice 111(1) requirement  then the amount in question will be deemed as “concealed income” by the Commissioner. The consequences come fast and hard: 

1. Tax Addition at Highest Rates: The residual amount is taxed at the highest slab rate, which can go up to 45% for individuals in 2025. For example, an unmotivated investment of PKR 10 million can hike your tax liability by more than PKR 4.5 million plus surcharges. 
2. Assessment Surcharge and Penalties: This is the rate of penalization on the unpaid tax at 0.1% to a maximum limit of 50 % if caused due to delayed filing. Additionally, under section 182, penalties may extend up to 100% of the tax evaded if there is willful concealment. 
3. Assessment Amendments: Section 122 would allow the tax return for any entire year to be re-opened, resulting in an audit for up to the previous six years. And this goes beyond the specific item; he said everything gets re-evaluated. 
4. Legal Implications: Habitual offenders could be punished under section 182, which may lead to a fine up to PKR 50,000 and imprisonment for a year. At its worst it should go straight to the Appellate Tribunal or the High Court. Reason behind this is what it does people and money wise. 
5. Reputational and Practical Hits: You may be included in the Inactive Taxpayer List (ITL). It could bare you from being involved in property dealings, receiving government contracts or even making utility connections. For companies, it can result in frozen bank accounts and a shutdown of operations. 

 

How to Respond? 

Don’t freeze, respond strategically. Here’s how: 

Step 1: Verify and Analyze: Sign in to IRIS and retrieve the notice. Cross-check your records. Just be sure to use the exact provisions.  

Step 2: Gather Evidence: Gather bank statements, salary slips, inheritance deeds, loan agreements or sales receipts. For remittances, keep that all-important encashment certificate safe. 

Step 3: Draft a Comprehensive Reply: Comment on each using your correspondence and reference specific Section 111 exclusions as appropriate. Refer to other legal interpretations, if necessary, foreign funds under 111(4). 

Step 4: Submit on Time: Please post on IRIS before the deadline. Ask for an extension if there are legitimate holdups. 

Step 5: Get Professional Help: Consult a tax consultant early. Income Tax services in Pakistan with add more to the watertight and safe responses prepared by tax consulting firms. It might save you from any additions. 

Pro Tip: Maintain a “tax diary” year-round; log all transactions with digital trails. This turns potential headaches into non-issues. 

 

Conclusion 

Section 111 of Income Tax Ordinance is no villain. It’s an anti-evading tax protector, a promoter of fairness in the economy of Pakistan. But for a tax-paying citizen, this may seem like a raid or an FBR notice 111(1). The answer to that is transparency from the very beginning. Be factual in all reporting and keep good documentation of events to answer questions properly. 

If you have received such a notice, know this: It’s not the end; it’s an opportunity to strengthen your compliance. Seek advice, avail the judiciary’s protection and turn compliance into confidence. After all, in the FBR world a rupee explained is a tax-free worry!