he Supreme Court ruled in favour of taxpayers, holding that new penalties or additional financial liabilities cannot be imposed on past tax matters under subsequently enacted laws.

A five-member larger bench also resolved a legal inconsistency in earlier judgments on the issue.

The court held that a tax penalty was not merely procedural or a matter of proceedings but constituted an additional financial liability, which could only be imposed where there was clear statutory authority.

The bench rejected the tax authorities’ attempt to impose new penalties on tax assessments relating to the period up to June 30, 2002, observing that a subsequently enacted law could not create a new financial liability retrospectively.

The judgment clarified that tax laws could not be applied retrospectively to impose liabilities that did not exist when the relevant tax assessment was made.

The SC also dismissed the appeal filed by the tax department, upholding the taxpayers’ position on the retrospective application of penalties.

The judgment was authored by Justice Aqeel Ahmed Abbasi, who was a part or the five-member larger bench.