Vibes of The Computer Random Ballot For Selection of The Cases For Audit Under Section 177 of The Income Tax Ordinance 2001

VIBES OF THE COMPUTER RANDOM BALLOT FOR VIBES OF THE COMPUTER RANDOM BALLOT FOR SELECTION OF THE CASES FOR AUDIT UNDER SECTION 177 OF THE INCOME TAX ORDINANCE, 2001 By Sayyid Ali Imran Rizvi, Advocate, Lahore The Federal Board of Revenue held computer random balloting at Federal Board of Revenue House, Islamabad on 11-12-2009, and selected 921 corporate entities and A.O.Ps. for composite audit for the Tax Year 2008 under section 177 of the Income Tax Ordinance, 2001, under section 25 of the Sales Tax Act, 1990, and under section 46 of the Federal Excise Act, 2005 (as amended by the Finance (Amendment) Ordinance, 2009). This mode of selection for audit is not countenanced by any provision of the Income Tax Ordinance, 2001, that's why, it has created a hue and cry among the selectees, and the F.B.R. is again facing writs against this audit, wherein the hon'ble High Courts have stayed the audit proceedings, and the Department is again helpless in generating anymore revenue from the audit of cases selected through the random ballot. None else, except the policy-makers of the F.B.R., can be accused for this sorrow state of affairs, as they come forward with half-baked, rather totally raw and ill-based, policies, which fail to stand the test of judicial scrutiny, and are set at naught by the judicial fora. If the big guns of F.B.R. pay heed to the case-law being developed on the issue, and associate eminent tax practitioners in policy making, there will be little chance of facing any adverse situation like the one which the F.B.R. has been facing since the Assessment Year 2002 -2003. We would first comment on the vices of the selection of cases for audit through random ballot as under:-- (1). The Federal Board of Revenue does not find any mention in the newly-substituted section 177 of the Income Tax Ordinance, 2001 as an authority to make selection of the taxpayers for audit. Section 177 (ibid) as it exists now was substituted by the Finance (Amendment) Ordinance, 2009 w.e.f. 28-10-2009, and it confers power of selection of a taxpayer for audit only upon the Commissioner. Section 177 (ibid) is reproduced hereunder for the facility of reference:- "177. Audit.---(1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for Conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may take into possession such machine and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate. (2) After obtaining the record of a person under sub- section (1) or where necessary record is not maintained, the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person or any other person may call for such other information and documents as he may deem appropriate. (3) Omitted (4) Omitted (5) Omitted (6) After completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years. (8) The Board may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966) to conduct an audit of the income tax affairs of any person or classes of persons selected for audit by the Commissioner or by the Board and the scope of such audit shall be as determined by the Board on a case to case basis. (9) Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that subsection. (1) Notwithstanding anything contained in subsections (2) and (6) where a person fails to produce before the Commissioner or a firm of Chartered Accountants or a firm of Cost and Management Accountants appointed by the Board under sub section (8) to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the firm of Chartered Accountants or the firm of Cost and Management Accountants for the purpose of audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect.". 2. Even under the section 177, which existed during the Tax Year 2008 and upto 27-10-2009, the Federal Board of Revenue was invested with the power of laying down only a criteria of selection for audit, and even then the selection had to be made by the Commissioner in accordance with that criteria. Even under that section 177 the Federal Board of Revenue had no power to make selection of the cases through computer random ballot. 3. An arbitrary selection through computer random ballot is against the very spirit of section 177 of the Income Tax Ordinance, 2001, which provided for either parametric selection, or selection on the basis of certain grounds. 4. On one hand the Federal Board of Revenue has given a 16 Points Criteria for selection of the cases for audit, and on the other hand it has made arbitrary selection through computer random ballot without following any criteria. The 16-Points Criteria formulated by the F.B.R. is the most prudent yardstick for selection of cases. You may have a glance on it hereunder: - "(1) Imports in customs differ from declared imports in sales tax and/or income tax. (2) Output tax is different from 16 per cent and 21 per cent (as the case may be) of taxable supplies. (3) Input tax is different from 16 per cent and 21 per cent (as the case may be) of taxable purchases. (4) Total output tax minus input tax differs from net payment by five per cent. (5) Output tax/input tax ratio differs with sector's output tax/input tax ratio by five percentage points. (6) Gross profit to sales ratio (income tax) differs with sector ratio (cases where gross profit growth is less by two percentage points as compared to sectoral growth rate). (7) Net profit to sales (income tax) declared ratio differs with sector ratio (cases where net profit growth is less by two percentage points as compared to sectoral growth rate). (8) Decline in sales (income tax) is more than 10 per cent as of the last year. (9) Decline in supplies (sales tax) is more than 10 per cent as of the last year. (10) Claim of overruled amount of refund under STARR-related checks is more than 50 per cent of the claim or Rs.2 million or above -- overruling pertaining to following STARR-related checks i.e. Bill of entry, invoices, returns, shipping bills, supplier status. (11) Claim of refund of Rs. 2 million or above in Income Tax. (12) Persistent decrease in gross profit over last three years. (13) Persistent decrease in net profit over last three years. (14) Consistent decrease in output tax/input tax ratio over last three years. (15) Decrease in proportion of taxable supplies to total supplies in last three years by 10 per cent in each year. (16) Continuously declaring declined income for the last three years.". 5. The impugned selection through computer random ballot is utterly against the direction of the hon'ble Lahore High Court, Lahore in Writ Petition No.4630 of 2009 reported in 2009 PTD 1507, which required the Federal Board of Revenue to lay down a criteria ensuring that persons similarly placed are treated alike in furtherance with Article 25 of the Constitution of Islamic Republic of Pakistan, 1973 and selection of cases for audit on the basis of whimsical pick and choose at random resulting in discrimination ought to be avoided. 6. The selection through computer random ballot is not warranted under any provision of the Income Tax Ordinance, 2001. 7. By making the impugned selection for audit, the Federal Board of Revenue has usurped the powers of a Commissioner under section 177 of the Income Tax Ordinance, 2001, which is permissible neither under any provision of the Income Tax Ordinance, 2001, nor under general law. Even under section 210 of the Income Tax Ordinance, 2001 a Commissioner cannot delegate his power of selection for audit under section 177 of the Ordinance to any authority under section 207 of the Ordinance. 8. It is trite law that where a law provides to do a thing in a certain manner by a defined authority, it has to be done in that particular manner and by the defined authority. Reliance is placed on the binding precedent of the hon'ble Supreme Court of Pakistan reported in 2008 SCMR 1148. 9. Even the cases falling within the Fixed Tax Regime (F.T.R.) have been selected through random ballot, which is not warranted at all. Where a taxpayer falls under the Fixed Tax Regime and it pays the Fixed Tax in full, it cannot be subjected to any hassel of audit into its 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 case of the importers and exporters, the sales, purchases and other expenses incurred by them do not enter into computation of their taxable income, rather they are taxed on the basis of their imports/export realisations, and that tax has been declared to be the final tax. There is thus no sense in subjecting such a case to audit, especially when no further tax can be levied as a result of such an audit. Audit in such a case 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 ITAT 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 ITAT 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 of 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) 10. No adverse order like committing the petitioner/taxpayer's case for audit can be passed without providing prior opportunity of hearing, otherwise it will be in utter violation of 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) 2010 SCMR 1; (b) 2007 SCMR 330; (c) 2005 SCMR 678; (e) 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). 11. 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 purfunctory 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) (b) 2005 YLR 1719 "It is pertinent to mention here that Courts insisted upon disclosure of reason 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) Despite all the above ordains of law, the F.B.R. has arbitrarily resorted to make the impugned selection without any reason whatsoever, which is utterly against the Federal Board of Revenue's own 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. decided that 'the officer would henceforth explain the justification for selection of cases'. The Commissioner (Audit) could have very conveniently convey the reasons of committing the taxpayer's case for audit, and after obtaining the taxpayer's reply could have made a better decision as to .whether audit into the tax affairs of the taxpayer was warranted or not. Outright 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. 12. The F.B.R. has exercised the discretion vesting in the Commissioner (Audit) in an oppressive and clearly discriminatory manner adversely affecting the liberty and property of the taxpayers selected for audit, whereas the 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) 13. The Audit under section 177 of the Income Tax Ordinance, 2001 prejudically affects a taxpayer. It subjects a taxpayer to the unbridled discretionary power of the Commissioner as well as the Deputy/Assistant Commissioner (Audit). There is no right of appeal either against the order under section 177 of the Income Tax Ordinance, 2001, or the audit report. 14. The impugned selection of the taxpayers' cases for audit is in utter violation of Articles 4 and 25 of the Constitution of the Islamic Republic of Pakistan, 1973, which require that all the citizens be dealt with in accordance with law, and there should be no discrimination among the equals.