Audit under the Income Tax Ordinance, 2001

AUDIT UNDER THE INCOME TAX ORDINANCE, 2001 <!--[if gte mso 10]> AUDIT UNDER THE INCOME TAX ORDINANCE, 2001 By Sayyid Ali Imran Rizvi, Advocate, Lahore Necessity of Audit: Necessity of audit into a taxpayer's income tax affairs arises out of the fact that all the taxpayers do not return their income truly, and some of them do file untrue particulars of their income. The ratio of such untrue declarations is the same, as is the ratio of crime in our society. As all the citizens of a country cannot be said to be criminals because some of them commit crimes, likewise all the taxpayers cannot be said to be tax-dodgers and liable to be treated as criminals. As an accused is a favourite child of law and he is punished only if his case squarely falls within a particular provision of Penal Code, likewise a taxpayer guilty of tax fraud cannot be condemned merely on suspicions, and he cannot be taxed until and unless the income sought to be evaded squarely falls within a taxing provision. We do subscribe to the necessity of audit in case of untrue declarations of income, but we do agitate against the notion prevailing among the tax collectors that all the taxpayers are the tax-dodgers, and they have unquestionable discretionary powers to pick any of them for audit, and the person arbitrarily picked up for audit has no right to agitate against his selection for audit, as the selection for audit does not cause any prejudice to the taxpayer. All the decisions rendered so far on the issue of selection for audit support the said departmental notion that a taxpayer selected for audit should succumb to the arbitrary decision of the Commissioner of Income Tax (Audit) calmly and quietly, and there is no remedy against selection for audit until and unless any amended assessment under section 122 of the Income Tax Ordinance, 2001 is made. Such an attitude of the tax law enforcing agency and the Courts entrusted with the function of interpreting tax laws reminds us of the fact that the new income tax law i.e. the Income Tax Ordinance, 2001, was designed by an Austrian Professor under the dictates of a military ruler, and it is a hard fact that dictators are delicate-natured and they do not like to hear anything against their whims and caprices. Zaib-un-Nissa Makhfi---- daughter of Aurangzeb Alamgir, has beautifully described the nature of such dictators in this verse: The military rule in our country has come to an end, and our statesmen are trying to make us believe that we are now living as a democratic nation. Everybody knows that democracy means government of the people, by the people, for the people. We should now be having every right to ask our rulers to eliminate the autocratic trends from the income tax law in vogue, and bring it in harmony with the norms of Islamic democracy where every citizen has an inherent right to challenge the decisions of the rulers adversely affecting the citizens. Analysis of section 177 providing for selection for audit: Audit under the Income Tax Ordinance, 2001 is provided in section 177, which reads as under:- "177. Audit.---(1) The Board, may lay down criteria for selection of any person for an audit of persons income tax affairs, by the Commissioner. (2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the Board under sub-section (1). (3) The Board shall keep the criteria confidential. (4) In addition to the selection referred to in subsection (2),the Commissioner may also select a person for an audit of the person's income tax affairs having regard to--- (a) the person's history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter which in the opinion of Commissioner is material for determination of correct income. Two modes of Selection for audit: This section provides for the selection of a case for audit in two ways, namely: (i) under subsection (2) on the criteria laid down by the F.B.R. under subsection (1); and (ii) under subsection (4) having regard to (a) The person's history of compliance or non-compliance with this Ordinance; (b) The amount of tax payable by the person; (c) The class of business conducted by the person; and (d) Any other matter which in the opinion of Commissioner is material for determination of correct income. Selection under section 177(2): It is day-light clear from a cursory reading of section 177 (ibid) that selection under subsection (2) cannot be made unless the F.B.R. gives a criteria for selection of cases for a certain tax year. This criteria has to be for a tax-year, as the unit of assessment under the Income Tax Ordinance, 2001 is the income earned in a Tax Year. It means that the criteria have to be given before the end of the Tax Year and the selection for audit ought to be made before the end of the Tax Year. It is against the policy of law to keep the taxpayers on tenter-hooks indefinitely. Law favours initiation of actions within a reasonable time, and when no time limit has been prescribed, courts have laid a period of ninety days to be a reasonable time. Keeping this in mind, the Department is left with nine months in case of non-corporate taxpayers, and six months in case of corporate taxpayers after filing of Returns for scrutiny and selection of their cases in accordance with the criteria laid down by the Federal Board of Revenue. Selection under section 177(4): Subsection (4) of section 177(ibid) starts with the clause "In addition to selection referred to in subsection (2)", which means that the power vesting in the Commissioner under subsection (4) is not invokable until and unless the Federal Board of Revenue has first laid down a criteria under subsection (1) and the Commissioner has made the selection in accordance with that criteria under subsection (2) for a particular Tax Year. If the Federal Board of Revenue does not lay down a criteria for selection of cases for a particular Tax Year, it means that the Federal Board of Revenue does not intend to make audit of any taxpayer for that particular Tax Year. In such a case, the Commissioner cannot exercise his additional power under subsection (4), as that may be exercised only after selection under subsection (2). The rationale of power given to the Commissioner under sub-section (4) appears to be that if after selection under subsection (2), the Commissioner finds a case which though not liable to be selected in accordance with the F.B.R.'s criteria, yet the income returned by the taxpayer is not correct, he may select the case of such a person for audit in order to determine his correct income having regard to the certain factors enumerated in clauses (a) to (d) of subsection (4) of section 177 (ibid). Until and unless the Commissioner having regard to clauses (a) to (d) of subsection (4) of section 177 (ibid) comes to a definite finding that the income returned is incorrect, he cannot assume jurisdiction under subsection (4) (ibid). If the Commissioner selects a case for audit under section 177(4) without recording a finding that the income returned is incorrect, the Order under section 177(4) would be illegal and without lawful authority. It should be needless to say that such a finding would not be arbitrary and fanciful, as section 24-A of the General Clauses Act, 1897 provides that "Where, by or under any enactment, a power to make any order or give direction is conferred on any authority, office or person, such power shall be exercised reasonably, fairly, justly and for the advancement of the purpose of the enactment," and "the authority making any order shall give reasons for making the order". Even prior to insertion of section 24-A in the General Clauses Act, 1897, the hon'ble Supreme Court of Pakistan has always deprecated summary disposal of a lis by passing perfunctory and unreasoned orders. Reliance is placed on: PLD 1970 SC 173, wherein the hon'ble apex Court held as under:-- "If a summary order of rejection can be made in such terms, there is no reason why a similar order of acceptance saying: "there is considerable substance in the petition which is accepted", should not be equally blessed." (at p. 175) In another case reported in PLD 1970 SC 158, the Hon'ble Supreme Court held as under:- "Such an order, we regret to say, does not disclose a proper application of the mind of the High Court to the merits of the case that was before it." (at p. 161) Following the above law and dicta, the Hon'ble Lahore High Court and other High Courts have also been laying great stress upon recording of reasons for an order. Some of the cases are referred to hereunder: -- (a) 2005 MLD 1844 "Under law, every Court or authority dispensing judicial or quasi-judicial functions is required to give reasons in support of its decisions/orders, especially when those deprive someone of his vested rights" (at p. 1853) 2005 YLR 1719 "It is pertinent to mention here that Courts insisted upon disclosure of reasons in support of order on the following reasons:- "(A) The party aggrieved has the opportunity to demonstrate before the appellate, or revisional Court that reasons which persuaded the authority to reject his case were erroneous; (B) The obligation to record reasons operates as a deterrent against possible arbitrary action by executive authority invested with judicial power; and (C) It gives satisfaction to the party against whom the order is made." (at p. 1723) As a sequel to the above, we can say with confidence that Audit under section 177(4) of the Income Tax Ordinance, 2001 is neither a wild goose chase, nor a leap into the dark on a pseudo-hope that there would be a silver lining. It does not permit fishing enquiries. It is a solemn and serious action encroaching upon the liberty and property of a taxpayer. Hence, it cannot be allowed, unless reasonable grounds do suggest that the income returned by a taxpayer is incorrect, and audit into his tax affairs is a must for determination of his correct income. Selection under section 177(4)(d) only: When selection is made only under clause (d) of subsection (4) of section 177 (ibid), it means that the CIT (Audit) has no objection as to--- (a) the person's history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; and (c) the class of business conducted by the person. When the CIT (Audit) has no objection as to a taxpayer's--- (a) history of compliance or non-compliance with this Ordinance; "(b) the amount of tax payable by the person; and (c) the class of business conducted by the person, (c) what moral and legal justification does he possess to select the case for audit? Selection under section 177(4) (ibid) cannot be made with reference to any one or more of the clauses (a) to (d) of subsection (4). Word "and" occurring after clause (c) and before the last clause (d) clearly suggests that the factors enumerated in clauses (a) to (d) must co-exist in order to render a case liable for selection under section 177(4)(ibid). Selection under section 177(4) without justified reasons: I and my brother Tax Practitioners have come across a number of Orders under section 177(4) (ibid), which do not contain any finding that the income declared is incorrect, but still the Commissioner is committing a case for audit. Committing a case in such a lighter vein appears to be a joke. When there exist no reasons to impute incorrectness to the returned income, no selection for audit is warranted under section 177(4) (ibid). Such an Order under section 177(4)(ibid) is liable to be quashed in writ jurisdiction being illegal and without lawful authority. Some Orders under section 177(4)(ibid) do contain some reasons, which are like: or the reason which the wolf was giving to the baby sheep that if it would drink water, the water would become dirty or the reasons are given in general terms like the ones-- (i) The declared expenses seem to be inflated and required verification with regard to their admissibility and genuineness in terms of sections 21 and 174 of the Income Tax Ordinance, 2001; (ii) The Sales & Purchases are to be scrutinised with reference to quantitative and qualitative analysis; (iii) Deduction of Withholding Tax on salaries under Clause (c) and admissibility of expenses in terms of Clauses (I) & (m) of section 21 is to be examined; (iv) The valuation of Closing Stock is to be made in the light of section 35 of the Income Tax Ordinance, 2001; (v) The genuineness of the purchases made is to be checked and it is also to be ascertained as to whether payments of purchases exceeding Rs. 50,000 in aggregate under single account head were paid through crossed cheque drawn on a bank or by a crossed bank draft or crossed pay order or any other crossed banking instrument, showing transfer of amount from the business bank account of the taxpayer or otherwise need examination and probe; and (vi) The genuineness of the expanses incurred and to ascertain as to whether expenses exceeding in aggregate Rs. 50,000 under a single head of account were made through crossed cheque drawn on a bank or by crossed bank draft or crossed pay order or any other crossed banking instrument, showing transfer of amount from the business bank account of the taxpayer or otherwise needs examination and probe. Such grounds are general and the most vague, which may be alleged in every case. When the vast majority of cases in not being subjected to audit on such grounds, how can a particular case be subjected to audit? It would certainly be a discrimination and arbitrary pick and choose. When an action is tainted with discrimination, it is fraught with malice, which smashes the whole edifice of an action by a quasi-judicial authority, and renders the proceedings taken void ab initio, illegal and without lawful authority. Merely giving of reasons is not enough. The reasons given must be justified. F.B.R. insists upon selection on justified reasons: The Federal Board of Revenue is fully apprised of the fact that selection is being made assigning unjustified reasons, that's why the F.B.R. issued Letter C. No. 6(8) Rev. Bud/2008, dated 22-7-2008, wherein the Board has laid great stress on giving justified reasons for selection, as, according to the Board, unjustified reasons for selection `not only defeats the spirit of Universal Self-Assessment Scheme, rather affects negatively on the reforms agenda of the F.B.R.'. In view of this, the F.B.R. has decided that `the officer would henceforth explain the justification for selection of cases'. Though the F.B.R. has taken a principled stand in the said Circular, yet its own conduct is contrary to its stand. Whenever selection of a case under section 177(4) is assailed under section 7 of the Federal Board of Revenue Act, 2007, the Federal Board of Revenue issues a stereotyped Letter stating that: "The issue has been examined and it was found that the representation does not attract the provisions of section 7 of F.B.R. Act, 2007. However, you may comply with the notice dated .for the tax year ..issued by Commissioner of Income Tax, Audit Division, RTO, Lahore.". It is astonishing that on one hand the F.B.R. is laying such a great stress on assigning of justified reasons of selection, and on the other hand Representations are being rejected without assigning any reason whatsoever in a summary mode not countenanced by law. Reasons and record are the two hall-marks of all judicial and quasi-judicial proceedings. An order without reasons is no order in the eyes of law. It has been held in 2001 YLR 1647 that the exercise of jurisdiction by any judicial authority should be for objective reasons appearing in the order, failing which it is liable to be assailed as an order suffering from impropriety, non-application of mind and suffering from arbitrariness'. In 2005 MLD 844, it has been held that an authority dispensing judicial function is required to give sound reasons in support of its decisions/orders, especially when it deprives someone of his vested right. Some instances of justified reasons for selection of a case under section 177(4): (1) Taxpayers do claim credit of the tax collected by the bankers under section 231-A of the Income Tax Ordinance, 2001 (i.e. tax on cash withdrawals), and append bank statements in support of the claim. If the debit and credit entries are not compatible with the declared purchases and sales, they may furnish a good ground for selection for audit. (2) Electricity bills are appended with the Return for claiming credit of the tax paid under section 235 of the Income Tax Ordinance, 2001. Units consumed may be used for working out production in case of manufacturing concerns, and if any disparity with the declared results is found out, selection may be made for audit. (3) If the G.P. rate disclosed by a taxpayer is ridiculously lower than the parallel cases, he may be subjected to audit for proving the declared low G.P. (4) Apparently unexplainable accretion in assets may furnish a good ground for selection of a case for audit, etc., etc. REVIEW OF THE DEPARTMENTAL CONTENTIONS (1) Unquestionable Discretion vests in the Commissioner under section 177(4) (ibid): Department has been defending the action taken by the Commissioners (Audit) on the plea that the selection under sec tion 177(4) (ibid) is being made in exercise of the discretion vested in the Commissioner and such exercise of discretion is not questionable by the Hon'ble High Courts in writ jurisdiction. There is a lot of case-law on the issue that discretion vesting in an authority is never unbridled. It has to be exercised reasonably, fairly, justly and for the advancement of the purpose of the enactment. [Ref: Section 24-A of the General Clauses Act, 1897]. It cannot be exercised in an oppressive and discriminatory manner adversely affecting the liberty and property of a taxpayer, whereas other taxpayers similarly situated have been spared. It has been held in 2001 SCMR 256 that discretion becomes an act of discrimination when it is improper or capricious exercise or abuse of discretionary authority and the person against whom that discretion is exercised faces certain appreciable disadvantages which he would not have faced otherwise. In another case reported in 1999 SCMR 467, the Hon'ble Supreme Court held that the Government is not supposed to discriminate between the citizens and its functionaries cannot be allowed to exercise discretion at their whims, sweet-will or as they please, rather they are bound to act justly. Improper, capricious exercise or abuse of discretionary authority is subject to judicial review. [Ref: 1992 CLC 219] (2) No Notice is required prior to selection of a case for audit under section 177(4)(ibid): This plea is being canvassed by the Department mainly on the strength of the case titled "Commissioner of Income Tax and others v. Messrs Media Network and others" reported in 2006 PTD 2502. This case related to the parametric selection of cases for the Assessment Year 2002-03. While selecting the case for audit under para.9(a)(ii) of the Self-Assessment Scheme for the Assessment Year 2002-03, the R.C.I.Ts. did confront the assessees with the grounds of selection, and did accord proper hearing to the assessees. There was thus no question of non-issuance of notice prior to selection. Before and after that decision, the Hon'ble Supreme Court has laid great stress upon strictly following the well-cherished norm of natural justice: audi alteram partem, which is to be read into every statute, according to the following verdicts of the Hon'ble Supreme Court of Pakistan: (a) PLD 2008 SC 663; (b) 2007 SCMR 330; (c) 2005 SCMR 678; (d) 2005 SCMR 1814; and (e) PLD 2004 SC 441. Consequences of non-adherence to the above canon of natural justice have been laid down as under: (i) An adverse order made without affording an opportunity of personal hearing is to be treated as a void order (2005 SCMR 1814); and (ii) Its violation is always considered enough to vitiate even the most solemn proceedings (2005 SCMR 678). We wonder why the Department is relying so heavily on a precedent which is in deference to the previous and subsequent reported judgments of the same apex Court. When the Hon'ble Supreme Court has not followed the said decision in subsequent verdicts, the subordinate High Courts and Tribunals should also ignore that decision like the one in the famous Bhutto's case. That exceptional judgment has never been quoted as a precedent. There is no harm in issuing a notice containing the reasons of selection and affording opportunity of hearing prior to selection of a case for audit under section 177(4)(ibid). The CIT (Audit) can very conveniently convey the reasons of committing a taxpayer's case for audit, and after obtaining the taxpayer's reply can have a better decision as to whether audit into the tax affairs of a taxpayer was warranted or not. Out-right selection of a case for audit not only shows the arbitrariness of the decision; but also it makes the selection for audit unreasonable, unfair, unjust, unlawful and mala fide. Selection for audit in such a manner has been deprecated by the higher judicial forums. (3) Selection under section 177(4)(ibid) does not cause prejudice to the taxpayer: This plea of the Department is incomprehensible and ridiculous. When 95% similarly placed taxpayers are not subjected to audit, and only 5% taxpayers are. put to the horns of a dilemma like audit, and the taxpayers selected for audit have to undergo the rigours of prolonged hearings, harassment and threats of the Taxation Officers to levy heavy taxes, how can it be said that selection for audit causes no prejudice to a taxpayer. Selection for audit does subject a taxpayer to the unbridled discretionary power of the Commissioner as well as the Taxation Officer (Audit). There is no right of appeal either against the Order under section 177 of the Income Tax Ordinance, 2001, or the audit report issued by the Taxation Officer. It has been held by the Hon'ble Karachi High Court in 2005 PTD 1974 that the return filed and accepted under section 120 of the Income Tax Ordinance, 2001 enjoys protection against any bald or arbitrary action, and subjecting a case to audit in such a manner will be against the very spirit of Universal Self Assessment Scheme (U.S.A.S.). (4) Closure of audit proceedings if nothing found adverse: Every order under section 177(4)(ibid) contains a Department's political statement at the end in bold letters saying:- "It is, however, assured that if nothing adverse is detected, audit proceedings will be closed.". This statement is again incomprehensible and a big joke! Every sane person can understand that something adverse would be found during the audit proceedings. When the audit proceedings have been conducted fully by the Department in order to find out something adverse to the taxpayer's declared version, what `audit proceedings' remain to be closed `if nothing adverse is detected'. There is not even a single case selected under section 177(4)(ibid) in which the Department has withdrawn the Order under section 177(4) (ibid) despite forceful rebuttal of the reasons of selection by the taxpayer. (5) Selection of cases falling under the Presumptive Tax Regime: Where a taxpayer falls under the presumptive tax regime and he pays the presumptive tax in full, he cannot be subjected to any hassel of audit into his tax-affairs. Even if there is a positive evidence of short-payment of tax, only the short-paid tax can be recovered, but the taxpayer cannot be made to go through the rigours of any audit or normal law assessment proceedings. In such cases, the sales, purchases and other expenses incurred by the taxpayers do not enter into computation of their taxable income, rather they are taxed on the basis of their presumptive income, and that tax has been declared to be the final tax. There is thus no sense in subjecting such cases to audit, especially when no further tax can be levied as a result of such an audit. Audit in such cases is thus unwarranted, illegal and without lawful authority. It has been held by the Hon'ble Karachi High Court in 2003 PTD 739 that: " .in the presumptive tax regime there is no concept of probe, inquiry or proceedings enunciated under sections 61 and 62 of the Income Tax Ordinance, 1979, and therefore the question of issuing any notice under sections 61/62 of the Income Tax Ordinance, 1979 does not arise. In the facts and circumstances of the case when presumptive tax regime is adhered to there is no question of issuance of notice under sections 61/62 of the Income Tax Ordinance, 1979. (at p. 742) The Hon'ble I.T.A.T. has dilated on the issue in 2000 PTD (Trib) 2193 as under: "Once it is held that any transaction is covered under the presumptive tax regime then all subsequent actions are to be taken pertaining to the presumptive tax regime and no provisions relating to the normal tax regime shall be attracted until and unless provided for to be otherwise in the Ordinance. We may point out that under section 52 it is provided that where any person fails to deduct or collect or having deducted or collected, fails to pay the tax, he shall be deemed to be an assessee in default in respect of such tax, and all the provisions relating to recovery of tax from the assessee shall be applicable . 'We are of the considered opinion that the findings that if the tax is not deducted or collected in respect of a deemed income under section 80C, the Assessing Officer can resort to the provisions contained in section 65 is the mistake of law apparent on record and consequently the orders dated 23-10-1999 and 27-12-1999 are hereby recalled. It is held that the. alleged receipts in the hands of the applicant/assessee are admittedly covered under the presumptive tax regime, therefore, the Assessing Officer had no jurisdiction to re-open the assessment under section 65 and call upon the applicant / assessee to file return of income in clear contravention and violation of the provisions contained in section 80C of the Ordinance. The Assessing Officer had no jurisdiction to issue notice under section 65 which is held to be illegal and of no legal effect. The entire proceedings in pursuance of notice under section 65 are held to be without jurisdiction, illegal and void. (at p. 2203) Explaining the nature and consequences of payment of presumptive tax, the Hon'ble I.T.A.T. has held in 2006 PTD (Trib) 2623 as under: "6 Since, sections 80C and 80CC of the Ordinance fall within the category of presumptive tax therefore the persons covered by them pay a predetermined amount of tax as full and final discharge of their tax liability. We are inclined to hold that presumptive tax is in fact akin to capacity tax i.e. capacity to earn. Moreover, imposition of presumptive tax under sections 80C and 80CC is substitution of the normal method of levy and recovery of the Income Tax. Generally the effect of a deeming provision in a taxing statute is that it brings within the tax net an amount which ordinarily would not have been treated as an income. In other words, it brings within the ambit of chargeability something which might not actually accrue, but which through a legal fiction shall be deemed to have accrued notionally. 7. It is also imperative to mention here that under this section issuance of statutory notices under sections 61 and 62 of the late Ordinance are neither required nor determination and computation bf income is to be made. Actually the provisions of section 80C are deeming in their character whereby no order whatsoever is to be passed rather the order shall be deemed to have been passed under section 59 of the Ordinance. Reasons being whole of the amount, on which tax has been deducted or collected under different subsections of section 50, is received by or accrues or arises or is deemed to accrue or arise to any person that shall be deemed to be income of the said person and tax thereon shall be charged at the rate specified in the first schedule. The amount which shall be subjected to tax under section 80C shall be the payments received on which tax is deductible under section 50(4). These payments shall be other than the payments received or accrued or arose on account of services rendered. Such tax shall be deemed to be the full and final discharge of tax liability of that person.". (at pp. 2626 & 2627) (6) Letter conveying selection for audit---an Order or a notice? A few learned Judges have taken the view that Letter of the CIT (Audit) conveying his decision to select a case for audit for certain reasons is a mere notice, and does not warrant invocation of writ jurisdiction. The words `notice' and `order' have not been defined by the Income Tax Ordinance, 2001. We will, therefore, have to grasp their meanings from the legal dictionaries. Black's Law Dictionary, 8th Edn., defines the words as under:- "Notice" 1. Legal notification required by law or agreement, or imparted by operation of law as a result of some fact (such as the recording of an instrument); definite legal cognizance, actual or constructive, of an existing right or title; 2. The condition of being so notified, whether or not actual awareness exists; 3. A written or printed announcement." "Order" 1. A command, direction, or instruction; 2. A written direction or command delivered by a court or Judge. The word generally embraces final decrees as well as interlocutory directions or commands. "An order is the mandate or determination of the court upon some subsidiary or collateral matter arising in an action, not disposing of the merits, but adjudicating a preliminary point or directing some step in the proceedings." 1 Henry Campbell Black, A treatise on the Law of Judgments 1, at 5 (2d ed. 1902) . " As the Letter of the CIT (Audit) conveying selection of a taxpayer's case for audit in exercise of the power given under section 177(4) of the Income Tax Ordinance, 2001 on certain grounds shows determination of the CIT (Audit) of the factum of selection for audit, which is the first step in the audit into a taxpayer's income tax affairs, it will certainly be an Order in accordance with the above-reproduced definition. As no appeal or other remedy is provided under the Income Tax Ordinance, 2001 against the Order under section 177(4)(ibid), invocation of extraordinary constitutional jurisdiction is the only remedy available to a taxpayer aggrieved of the Order under section 177(4)(ibid). SOME SUGGESTIONS FOR REMEDYING THE MALAINSE (1) Section 177 of the Income Tax Ordinance, 2001 must be accompanied by some open policy statements/rules to safeguard the rights of the taxpayers from abuse of powers by the executive authorities. In this regard, guidance must be sought from the following verdict of the Hon'ble Supreme Court of Pakistan in 1997 SCMR 1804:-- "The general principles that discretionary decisions should be made according to the rational reasons means; (a) that there be findings of primary facts based on good evidence, and (b) that decisions about the fact be made for reasons which serve the purposes of the statute in an intelligible and reasonable manner ..The actions which do not meet these threshold requirements are arbitrary, and may be considered a misuse of powers." [at p. 1810] "Wherever wide-worded powers conferring discretion exist, there remains always the need to structure the discretion .... The structuring of discretion only means regularizing it, organizing it, producing order in it, so that decision will achieve the high quality of justice. The seven instruments that are most useful in the structuring of discretionary power are open plans, open policy statement, open rules, open findings, open reasons, open precedents and fair in formal procedure. Somehow the wide-worded conferment of discretionary powers or reservation of discretion, without framing rules to regulate its exercise, has been taken to be an enhancement of the power and it gives that impression in the first instance but where the authorities fail to rationalize it and regulate it by rules, or policy statements of precedents, the courts have to intervene more often than is necessary, apart from the exercise of such power appearing arbitrary and capricious at times." [at p. 1810]. (2) Cases misdealt by the Hon'ble High Courts should be appealed against in the Hon'ble Supreme Court of Pakistan at Tax Bar level. It has often been seen that some half-baked writs are filed, and inept decisions are rendered by the Hon'ble Courts in such cases, which become binding precedents for want of further agitation in the Hon'ble Supreme Court due to lack of funds with the taxpayer. In such cases the Tax Bars should form Free Legal Aid Committees comprising senior members of the Bar, who should voluntarily fight the cases for the sake of setting the law in the right direction. Otherwise wrong precedents would continue giving succour to the Departmental high-handedness. (3) The matter of arbitrary selection of cases under section 177(4) (ibid) should be taken up by the Pakistan Tax Bar Association and the Pakistan Federation of Chambers of Commerce and Industry with the Hon'ble Chairman, F.B.R. (4) Subsection (3) of section 177 (ibid) providing for keeping the criteria laid down by the F.B.R. for selection under section 177(2)(ibid) "confidential" be deleted forthwith. State has a fiduciary relationship with the subjects. It is the custodian of their rights guaranteed by the Constitution and other laws of the land. State cannot cheat the subjects. A subject cannot be kept in dark as to the case he has to meet. Non-disclosure of the reasons of condemning a person is not only forbidden by the cannons of natural justice, but also it is highly immoral and unjust. It is strange enough that all the civilized nations are striving for making the governmental actions transparent, but our Parliament has authorized the F.B.R. to keep the criteria for selection of cases confidential. How can such a criteria be kept confidential, when section 24-A of the General Clauses Act, 1897 gives a right to an aggrieved person adversely affected by an Order to require the authority making the order to give reasons therefor. (5) F.B.R. should prescribe G.P. rates, production capacity formula and minimum N.P. rates for different businesses in consultation with the recognized trade bodies and after making market studies throughout Pakistan. This would lead to uniform treatment to all the similarly situated taxpayers in accordance with Article 25 of the Constitution of the Islamic Republic of Pakistan, 1973, and would eliminate discriminatory treatment. If any taxpayer would declare a G.P., N.P., or production lesser than the one prescribed by the F.B.R., he would have to face the audit under section 177(4), and it would be a good ground for selection for audit. When special procedure rules are effectively working for levying and collection of Sales Tax, why not such formula be prescribed for levying and collection of income tax? It would not only enhance the income tax coming to the State exchequer, but also it would put an end to the discriminatory treatments varying from R.T.O. to R.T.O. (6) F.B.R.'s Circular No. 1 of 2006, dated 1-7-2006 placing a wrong interpretation over clause (I) of section 21 of the Income Tax Ordinance, 2001 that: "Nov the language of the section 21(1) has appropriately been amended to include every expenditure whether debitable to trading or manufacturing accounts or profit and loss account will fall within the purview of said section." should be withdrawn forthwith, as it is being used as a sharp-edged blackmailing tool by the Department. It is impossible for all the taxpayers to make all the Purchases of Raw Materials and Merchandise against crossed cheques. It would jam the whole economy. In view of increasing trend of issuance of fake cheques and soft corner of the Police and our Courts for the drawer of such cheques, vast majority of the businessmen are hesitant to sell the merchandise against crossed Cheques. A decision of the Lahore High Court, Lahore reported in PLD 2005 Lah. 607 has excluded the Cheques issued in connection with business dealings from the purview of section 489-F PPC. A businessman having a dishonoured crossed cheque received from a buyer has been rendered helpless. Even otherwise, bringing a dishonest drawer of a crossed Cheque to book is an uphill and humiliating task. First thing is to get registered F.I.R. After getting the concession of interim pre-arrest bail from the Court of Session, dishonest drawer of cheque enjoys this concession for months, whereafter either his interim bail is confirmed, or even if rejected, he finds an easy escape to go to the Hon'ble High Court, where the process akin to the Court of Session is re-set in, and poor holder of a dishonoured cheque has to face again the same humiliation. A prudent reader of Negotiable Instruments Act, 1881 and the case-law developed by the Hon'ble apex Court on the issue, is unable to understand why a dishonoured cheque is taken so lightly when there is a presumption of law that a cheque is always issued against consideration. It is because of this presumption of law that Order 37 CPC provides for summary suit for recovery of the sum covered by a dishonoured cheque, and the dishonest drawer is not allowed to appear and defend the summary suit as a matter of right, except with the leave of the Court. Holders of dishonoured cheques at times have to face the following adverse situations:-- (i) an F.I.R. that the dishonest drawer had lost his cheque book out of which the dishonoured cheque has been maliciously issued by the holder of the cheque; (ii) a counter-claim of much more amount is set up against tit holder of dishonoured cheque through a civil suit (which is prolonged for years); (iii) it is pleaded through a civil suit that the drawer of the dishonoured cheque has already paid off the liability under the cheque in cash, but the beneficiary of the cheque is illegally holding that cheque and he has dishonestly tendered that cheque in order to rope in the `innocent' drawer; (iv) the dishonoured cheque was got irraee by the holder through coercion; etc., etc. Would any taxplanner sitting in the F.B.R. honestly say that a businessman should make sales of his merchandise against crossed cheques in the above scenario? We request the big guns of the F.B.R. to apply a judicious mind to the market realities, and refrain from entangling the tax-payers into such a mess of technicalities that the whole system may collapse. Instead of taking benefit of practical hardships of the taxpayers, equip your tax collectors with the art of digging out real income of taxpayers out of the data available in the Returns of Income and the accompanying accounts. Neither any cannon of accountancy, nor the tax law in vogue in any part of the civilized world allow that if the purchases of raw materials or merchandise have not been made through crossed cheques, the entire cost of sales would be disallowed and added towards net income of the taxpayer. Disallowing purchases means that the taxpayer has made no purchases. When he has made no purchases, how can he be taxed on the sales declared by him? No purchases mean no sales. I and my brother Tax Practitioners are in possession of several Notices from the Taxation Officers in respect of Tax Years 2007 and 2008, wherein the whole of the purchases have been disallowed in terms of clause (1) of section 21 of the Income Tax Ordinance, 2001 and added towards net income to be assessed. It seems that terrorism has become an order of the day in our society. Be it a clergyman or a tax collector, every body is bent upon achieving its aims through terrorism. Can you think that a businessman honestly paying tax can survive in such an atmosphere of terrorism under the umbrella of clause (1) of section 21 of the Income Tax Ordinance, 2001. Please do apply a judicious mind to the provisions of section 21 (ibid), you will certainly find that all the clauses thereof are aimed at curtailing the expenses relating to Profit & Loss Account in certain eventualities in view of the fact that unscrupulous taxpayers sometimes try to inflate the Profit & Loss Account expenses in order to minimize the taxable income. It is an open secret that all the businessmen economise the Manufacturing/Trading Expenses to the maximum extent in order to compete the market. That's why the Gross Profit rate declared by the businessmen in a particular trade is more or less the same. There is thus no reason to make unnecessary interference with the trading account. F.B.R. may achieve its object by prescribing the production capacity formula or turn-over capital ratio, and the Gross Profit rate for each business. (7) Cases falling under the Presumptive Tax Regime and Fixed Income Group like salary income, property income, profit on debt, etc. should not be selected for audit. (8) A class of taxpayers should not be selected in a particular R.T.O. only. It offends Article 25 of the Constitution. If a class of taxpayers is found guilty of tax evasion in any manner, it should be subjected to audit throughout the country, and a uniform criteria be prescribed for making determination of their income. (9) If there be a need of interpreting any provision of a tax law affecting the taxpayers in general, the matter may be placed directly before the Hon'ble Supreme Court of Pakistan. It would not only save the precious time of the Department as well the taxpayers, but also a prolonged litigation pending with the Income Tax Appellate Tribunal, Customs, Sales Tax and Federal Excise Tribunal, and High Courts would come to an end, and authoritative pronouncement of the apex Court would clinch the rival controversies in different parts of the country for ever. (10) Complaints against Officers making selection for audit on unreasonable grounds be addressed to properly by the F.B.R. under section 7 of the F.B.R. Act, 2007, and the complaints should not be rejected summarily through purfunctory orders manifesting no reasons at all. If any Officer is found to have made selection for audit on unreasonable grounds, he should be proceeded against for "misconduct" under the Government Servants (Efficiency and Discipline) Rules, 1973. A taxpayer having suffered the agony of selection for audit on reasonable grounds may bring a suit for damages against the delinquent Officer. Section 227 of the Income Tax Ordinance, 2001 contains no bar against such a suit, as it protects only those acts of the tax collectors which are in good faith done or intended to be done under the Ordinance, or any rules or orders made thereunder. Exercise of statutory authority on unreasonable grounds can never be pleaded to be `in good faith'. If an authority vested with discretionary powers cannot distinguish between the reasonable and unreasonable grounds while exercising powers has no right to hold that office.