SOURCE OF TAX LIABILITY AND THE NATURE OF TAX OBLIGATION

Taxation is one of the most important mechanisms through which governments generate revenue for the provision of public services and the promotion of national development. In every modern society, taxation serves as the financial backbone of government activities, enabling the state to fund infrastructure, education, healthcare, security, and other essential public services. Consequently, every responsible government relies significantly on tax revenue to discharge its constitutional and statutory responsibilities.

Generally, taxation may be defined as a compulsory levy imposed by law on individuals, companies, and other taxable entities for public purposes. Unlike voluntary contributions or donations, taxation is mandatory and enforceable by law. The compulsory nature of taxation distinguishes it from other forms of government revenue and underscores the obligation of citizens and corporate bodies to contribute towards the development of the state.

The primary purpose of taxation extends beyond revenue generation. Taxation is also used as a tool for regulating economic activities, redistributing wealth, encouraging investment, protecting local industries, and promoting social welfare. Through carefully designed tax policies, governments are able to influence economic behaviour and achieve broader developmental objectives.

The source of tax liability and the nature of tax obligation is rooted in statutory provisions. It is a fundamental principle of tax law that there can be no taxation without legal authority. In other words, no person can be compelled to pay tax unless such tax is imposed by a valid law enacted by a competent legislative authority. Consequently, the obligation to pay tax arises not from administrative directives or governmental discretion, but from express provisions of the law.

This principle was reaffirmed in the recent case of F.I.R.S. v. Agromix (Nig.) Ltd. (2025) 1 NWLR (Pt. 1974) 649, where the Court of Appeal (Ibadan Division) examined the limits of the powers of the Federal Inland Revenue Service (FIRS) in assessing tax liabilities. The case serves as an important reminder that while taxpayers are under a legal obligation to comply with tax laws, tax authorities must equally exercise their powers within the confines of the law. The fact leading to the instant case are stated in details as follows:

The appellant, the Federal Inland Revenue Service (FIRS), commenced an action against the respondent through an originating summons filed on 6 March 2019. The appellant sought the court’s determination on whether it had the statutory power under the Companies Income Tax Act (CITA) to assess the respondent’s tax liability when the respondent failed to file its audited accounts and annual returns, and whether the respondent was liable to pay a tax assessment of ₦7,612,200 made by the appellant under its “best of judgment” powers.

The appellant alleged that the respondent failed to file audited accounts and tax returns for the 2015/2016 year as required by section 55(3) of CITA. Consequently, the appellant engaged estate surveyors who valued the respondent’s undeveloped land in Asokoro, Abuja, at ₦126,870,000. Using this valuation as the company’s turnover, the appellant deemed 20% of the value as profit and assessed tax at 30% of that profit, resulting in a liability of ₦7,612,200. The appellant further claimed that it served an assessment notice on the respondent and that the respondent neither objected to the assessment nor paid the assessed tax despite subsequent correspondence.

The respondent denied liability, arguing that the valuation report and assessment notice were issued in the name of another company, Agromix Limited. It maintained that it had never commenced business operations, generated income, or made any profit since its incorporation in 1985. The respondent also contended that the value of its fixed asset, namely the Asokoro property, could not lawfully be treated as turnover for tax purposes. It produced an objection to the assessment and a statement of affairs in support of its position.

The trial court dismissed the suit, holding that although the appellant had the power to assess companies for tax, it could not use the value of the respondent’s property as turnover unless the property was being disposed of or the company was winding up. The court also found that the respondent had not commenced operations.

Dissatisfied, the appellant appealed, arguing that the trial court failed to determine the questions raised in the originating summons and wrongly ignored evidence, particularly exhibit FIRS 6, which it claimed amounted to an admission of liability. The respondent maintained that any correspondence suggesting willingness to pay was made under pressure and threats of distraint and could not create an estoppel. It also argued that no binding agreement arose because the appellant’s acceptance of the alleged offer was never communicated to it. The central issue on appeal was whether the appellant had validly established the respondent’s tax liability under CITA.

In determining the instant case, on source of tax liability, the Court of Appeal held that: 

“Being an imposition on the citizen, tax liability must be directly provided for in a statute. It cannot be inferred. A clear and direct nexus must be shown to exist between the charging provision in a tax statute and the intended taxpayer before any tax liability can be said to have arisen. All charges upon the subject must be imposed by clear and unambiguous language because to some degree they operate as penalties; the subject is not to be taxed unless the language of the statute clearly imposes the obligation. No pecuniary burden can be imposed upon the citizens of Nigeria by whatever name it may be called, whether tax, due, rate, or toll, except upon the clear and distinct legal authority established by those who seek to impose them.”

The court went further to emphasise on the nature of taxation obligation by holding thus:

“Tax obligation is penal in nature and the court has jurisdiction to inquire into the validity of an assessment in a claim to recover tax alleged to be due from a taxpayer under a relevant tax statute…”

It is important to note that the court resolved the case in favour of Agromix Nigeria Ltd. It held that although FIRS possesses statutory authority to estimate tax liabilities where taxpayers fail to file returns, such authority is not unlimited. The court settled that every assessment must be based on lawful, reasonable, and justifiable criteria.

The decision in FIRS v. Agromix Nigeria Ltd. is significant for several reasons:

First, it clarifies the limits of Best of Judgment assessments under Nigerian tax law. While tax authorities possess broad powers to estimate tax liabilities, such powers must be exercised within the limits prescribed by statute.

Secondly, the case reinforces the principle that administrative discretion must always be exercised reasonably and fairly. Government agencies are not permitted to act arbitrarily, even where taxpayers have failed to comply with their obligations.

Thirdly, the decision highlights the role of the judiciary in ensuring accountability within public institutions. Courts remain empowered to review and invalidate administrative actions that exceed statutory limits or violate established legal principles.

In conclusion, the case of FIRS v. Agromix Nigeria Ltd. (2025) serves as a valuable authority on the nature of taxation and the source of tax liability and obligations. The case demonstrates that taxation is governed not only by the obligation of taxpayers to comply with the law but also by the duty of tax authorities to exercise their powers lawfully. Ultimately, the decision reinforces the principles of legality, fairness, and accountability that underpin an effective tax system.

About the Authors:

Anas Ismail Yunus is a 400-Level Law Student and a Member of the Research and Litigation Directorate, Solace Chambers, Bayero University, Kano. He can be reached via 08167034933.

Naja'atu Idris Iliyasu is a 300-Level Law Student and a Member of the Research and Litigation Directorate, Solace Chambers, Bayero University, Kano. She can be reached via 08135733307.