2019 PLP 1608 (PTD)

M. TABASSUM AFTAB ALVI, C.J.

The captioned References have been made by Commissioner Inland Revenue, Muzaffarabad, against the impugned judgments of Income Tax Appellate Tribunal (ITAT), Muzaffarabad, dated 21.09.2011, 18.10.2011 and 30.11.2011, respectively. As common questions of facts and law are involved in the titled References; therefore, these are being consolidated and decided through the instant single judgment.

2. The brief facts leading to the instant References are that respondents/Taxpayers, except Muhammad Asif Fancy Garment, Rawalakot, filed their returns of Income Tax for the tax year 2004, whereas Muhammad Asif, filed return of Income Tax for the tax year 2005, in the Income Tax Office. However, their cases were selected for audit by invoking the provisions of section 177(4) of Income Tax Ordinance, 2001, by Commissioner Income Tax. Subsequently, Taxation Officer started assessment proceedings. The amended assessments orders under section 122(1) of the Ordinance, 2001, were issued by Taxation Officer, which were assailed through appeals by respondents, before Commissioner Income Tax (Appeals), Mirpur. The learned Commissioner accepted appeals filed by Kh. Muhammad Anwer, Muhammad Abbas Qadri, Kh. Anwer Javaid, Rizwan Irshad and Mahboob-ur-Rahman Tareen, and by modifying the assessment orders, their taxable incomes were reduced, vide orders dated 12.08.2010, 13.08.2010, 20.08.2010, 21.10.2010 and 22.10.2010, respectively. However, in appeals filed by Messrs Mir and Sons, Kh. Abdul Hameed, Messrs National Insurance Company and Muhammad Asif, the assessment orders were confirmed by Commissioner, vide orders dated 29.12.2009, 06.08.2010, 31.08.2010 and 30.09.2010, respectively. Both the parties feeling aggrieved from the aforesaid orders, preferred appeals before Income Tax Appellate Tribunal, Muzaffarabad, whereby amended assessments orders as well as orders recorded by Commissioner Income Tax (Appeals), were set-aside, vide the impugned judgments dated 21.09.2011, 18.10.2011 and 30.11.2011. The appeals were accepted on the ground that all these cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid law was inserted in the Income Tax Ordinance through Finance Act, 2004, which was supposed to apply to the cases pertaining to the tax year 2005 and onwards, therefore, subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not applying to the cases selected for audit for the tax year 2004 and section 177 was substituted by Finance Act, 2004, w.e.f. July 1, 2004, when tax year 2004 had already ended. The Commissioner Inland Revenue, Muzaffarabad, feeling dissatisfied from the aforesaid impugned judgments of the Income Tax Appellate Tribunal, Muzaffarabad, dated 21.09.2011, 18.10.2011 and 30.11.2011, have filed the supra titled References, which, in earlier round of litigation, were dismissed by this Court on two grounds; firstly, applications for References before this Court were incompetent and secondly, applications were time barred, vide judgment dated 7th April, 2015. Against the aforesaid judgment, appellant/Commissioner Inland Revenue, preferred appeals before the Apex Court on 6th June, 2015, whereby, the same were accepted and References were remanded to this Court for decision afresh on merit, vide judgment dated 15th June, 2016. The aforesaid References are, therefore, subject matter of the instant judgment.

3. Syed Nazir Hussain Shah Kazmi, the learned Counsel for appellant after narrating facts of the cases in his written arguments, submitted that Income Tax Appellate Tribunal (ITAT) did not decide the appeals on merits, rather the same were decided on law point by observing that since all cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid law was inserted in the Income Tax Ordinance through Finance Act, 2004, which was supposed to apply to the cases pertaining to the tax year 2005 and onwards, thus, subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not applying to the cases selected for audit for the tax year 2004 and section 177 was substituted by Finance Act, 2004, w.e.f. July 1, 2004, when tax year 2004 had already ended. He contended that the aforesaid finding of the ITAT is not correct, because all the aforesaid cases were selected by Commissioner for audit under subsection (1) of section 177 of Income Tax Ordinance, 2001, which provision was already existed in the Ordinance, 2001; however, it was renumbered/inserted as subsection (4) instead of subsection (1) of section 177, through Finance Act, 2004, thus, renumbering of the aforesaid subsection never affected the cases. He submitted that the learned ITAT failed to consider that all tax payers had never agitated the wrong selection of their cases for audit before the Assessing Officer or before the Commissioner Income Tax (Appeals), rather the same was raised first time before the Appellate Forum; hence, order of ITAT was against the pleadings of the parties. He finally craved for acceptance of all the References and submitted that the impugned judgments of ITAT, dated 21.09.2011, 18.10.2011 and 30.11.2011, are liable to be set-aside.

4. Conversely, Syed Shahid Bahar, Chaudhary Manzoor and Mir Abdul Latif, the learned Advocates for respondents, filed their written arguments, wherein, they submitted that questions framed by appellant are not arising out of appellate orders, because section 133(1) provides that Reference Application is required to be preferred stating therein 'any question of law arising out of such order', thus, questions framed being irrelevant and not subject matter of appellate orders and also not being controversial issues, are neither considerable nor maintainable. They submitted that issues raised in all the References were never argued by appellant before ITAT during hearing of appeals that's why no consideration was made by the Tribunal; hence, the question of law should arise out of order of Tribunal meaning thereby that it was raised, pressed, argued and decided by the Tribunal or it was considered and findings were given by the Tribunal. However, if any question of law is not raised before the Tribunal, it could not be raised for the first time before the High Court. They contended that so far as objection with regard to non-agitation of jurisdictional incompetence of Commissioner Income Tax regarding selection of cases for audit for the tax year, 2004, against the law and objection regarding non-insertion of this point in grounds of appeals specifically are concerned, it is stated that being aggrieved persons, respondents assailed selection of audit as well as assessment orders passed by the Assessing Officer through appeals, which itself is an ample proof that respondents had assailed the illegal orders, thus, observation of Department/appellant is without any substance. They further contended that References filed by appellant is an effort to mislead this Court, because correct legal and factual position is that section 177 existing on 30.06.2004, was repealed by way of substitution by new section 177(4) through Finance Act, 2004, with effect from 1st July, 2004, thus, a new section provided altogether a new scheme for the audit of tax affairs of the taxpayers. They agitated that Commissioner Income Tax clearly and expressly selected the cases of respondents under section 177(4), of Income Tax Ordinance, 2001, as it existed at the relevant time; thus, appellant-Commissioner intentionally tried to introduce a totally new case of repealed section 177(1) of ITO, which had no relevancy with the instant cases. They stressed that after substitution of the aforesaid section through section 177(4) of ITO, by Finance Act, 2004, no retrospective applicability of powers to select cases for audit by Commissioner prior to the tax year 2004, could be given; hence, the learned ITAT while observing that subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not attracted to the cases selected for audit for the tax year 2004 and section 177 was substituted by Finance Act, 2004, w.e.f. July 1,2004, when tax year 2004 had already ended, did not commit any illegality and correctly dismissed the appeals. The learned Advocates finally craved for dismissal of References with special costs.

5. At the very outset, we would like to take up law point, on the basis of which, the titled cases were decided by Income Tax Appellate Tribunal, Muzaffarabad. The learned Tribunal observed that all these cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid provision of law was inserted in the Income Tax Ordinance through Finance Act, 2004, which was supposed to apply to the cases pertaining to the tax year 2005 and onwards, thus, subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not applying to the cases selected for audit for the tax year 2004, and section 177 was substituted by Finance Act, 2004, w.e.f. July 1, 2004, when tax year 2004 had already ended. For deciding the aforesaid law point, we start with the examination of audit function under the Income Tax Ordinance, 2001. In order to examine the power of Commissioner under section 177 of the aforesaid Ordinance, it is important to examine legislative history of section ibid over the years. A thorough perusal of the history of section 177, Income Tax Ordinance, 2001, reveals that in the beginning, from 13.09.2001 to 30.06.2002, Commissioner enjoyed powers to select a taxpayer for audit on the basis of an objective criteria supplied in subsection (1)(a) to (d) of section 177 (as it then was), which speaks as under:-- "

177. Audit.

(1) The Commissioner may select any 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 that the Commissioner considers relevant." The Central Board of Revenue (as it then was) also enjoyed powers under section 177(3) of the Ordinance to appoint a firm of chartered accountants to conduct an audit of the income tax affairs of any person. However, the power to select a taxpayer for audit mainly laid with the Commissioner. During the period, from 01.07.2002 to 29.06.2004, the same position continued except with the insertion of sections 177(1-A) and (1-B) through Finance Ordinances, 2002 and 2003, which further streamlined the process of audit by emphasizing that audit be conducted once the taxpayer is selected for audit and in case of discrepancy, the assessment, be amended. The aforesaid subsections (1-A) and (1-B) of section 177, are reproduced as under:- "(1-A) After selection of a person for audit under subsection (1), 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. (1-B) After completion of the audit under subsection (1-A) or subsection (3), 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." Thereafter, through Finance Act, 2004, section 177, was substituted and Central Board of Revenue (CBR) was specifically given powers through its subsection (1) to lay down criteria for selection of any person, for audit of its tax affairs and through subsection (2), powers were given to the Commissioner to select a person for audit according to the criteria laid down by the CBR under subsection (1). The subsection (2) of substituted Section 177, speaks as under:

"(2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the Central Board of Revenue under subsection (1)." However, in addition to the selection referred to in the aforesaid sub-section (2), the Commissioner was also empowered to select a person for audit of the person's income tax affairs through section 177(4)(a) to (d), which postulates as under:-- "(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." This position continued till 27.10.2009 and the Commissioner enjoyed powers to select a person for audit according to the criteria laid down by the CBR or according to the statutory criteria under the aforesaid section 177(4), (a) to (d) of the Ordinance. Moreover, section 177(8) (as it was on 01.07.2009) postulated that CBR may appoint a firm of chartered accountants to conduct an audit of the income tax affairs of a person selected for audit by the Commissioner or by the Board of Revenue. However, under Finance (Amendment) Ordinances, 2009 and 2010, the word "select" was dispensed with in section 177(1) and the Commissioner was vested with the powers to call for record of any case for conducting audit of the income tax affairs of any person and more importantly the statutory criteria for selecting a taxpayer for audit by the Commissioner, provided in the aforesaid subsections (1) and (2) of section 177, was substituted with new subsections (1) and (2), which postulate as under:- "

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. (2) After obtaining the record of a person under subsection (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 and may call for such other information and documents as he may deem appropriate." The section 177(4)(a) to (d), which was providing powers to the Commissioner to select a person for audit according to the criteria laid down by the CBR or according to the statutory criteria under the aforesaid section 177(4)(a) to (d) of the Ordinance, was omitted from Statute. However, section 177(8), as it stood on 28.10.2009, provided that Board may appoint a firm of Chartered Accountants or a firm of Cost and Management, Accountants to conduct audit of the income tax affairs of any person or classes of persons and the scope of such audit shall be determined by the Board or the Commissioner on a case to case basis. Through Finance Act, 2010, Section 214-C, with the titled "Selection for audit by the Board", was also inserted and in year 2013, further amendments were incorporated in Section 214-C, through Finance Act, 2013. These amendments are not material for the decision of the matters before us, therefore, the same need not to be discussed. However, an explanation inserted in section 214-C, through Finance Act, 2013, is of considerable significance and has direct bearing on the matters before this Court. The same is reproduced below:-- "Explanation.

For the removal of doubt, it is declared that the powers of the Commissioner under section 177 are independent of the powers of the Board under this section and nothing contained in this section restricts the powers of the Commissioner to call for the record or documents including books of accounts of a taxpayer for audit and to conduct audit under section 177."

6. After revisiting the legislative amendments made, over years, in section 177, reveal that from 13.09.2001 till 27.10.2009, said section clearly provided that a taxpayer had to be selected for audit by the Commissioner on the basis of statutory criteria developed by the CBR or on the basis of the statutory criteria under section 177(4). However, after substitution of 177(1) & (2) and deletion of section 177(4), in year 2010, if at all there was any ambiguity about the powers of Commissioner, the legislature itself clarified and explained the same by inserting explanation in section 214-C, through Finance Act, 2013, where for removal of doubt it was declared that the powers of Commissioner under section 177, were independent of the powers of Board and nothing contained in section 214-C, restricted the powers of Commissioner to call for the record or documents including books of accounts of the taxpayer for audit and to conduct audit under section 177 of the Income Tax Ordinance, 2001. Thus, it would be safe to observe that the Explanation introduced in section 214-C of the Ordinance, vide Finance Act, 2013, has been introduced to clarify the extent of the authority of Commissioner to carry out audit of assessees under section 177 and that of the FBR under section 214-C. A careful reading of the provisions makes it finally clear that two authorities are independent and can initiate audit independently.

7. Adverting to the matters in hand, respondents-taxpayers, except Muhammad Asif Fancy Garment Rawalakot, filed their returns of Income Tax for the tax year, 2004, whereas Muhammad Asif, filed return of Income Tax for the tax year, 2005, in the Income Tax Office. However, their cases were selected for audit by invoking the provisions of section 177(4) of Income Tax Ordinance, 2001, by the competent authority, i.e. the Commissioner Income Tax, on 24.01.2009 and 25.04.2009, respectively. It appears from perusal of the afore discussed legislative history of section 177, ITO, that when cases of respondents-taxpayers were selected for audit on 24.01.2009 and 25.04.2009, the provisions of section 177(4), were applicable to the cases of respondents, because from 13.09.2001 till 27.10.2009, the Statute clearly provided that a taxpayer had to be selected for audit by the Commissioner on the basis of statutory criteria developed by the CBR or on the basis of the statutory criteria under section 177(4); hence, the Commissioner rightly selected cases of respondents for audit under the aforesaid provisions of section 177(4), as the Income Tax Ordinance, 2001, was adapted in the Azad Jammu and Kashmir vide Act IV of 2002, w.e.f. 1st July, 2002, while repealing the Azad Jammu and Kashmir Council (Amendment) Act, 1979.

8. The findings given by the learned ITAT, that all these cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid provisions of law were inserted in the Income Tax Ordinance through Finance Act, 2004, which was supposed to apply to the cases pertaining to the tax year 2005 and onwards, thus, subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not applying to the cases selected for audit for the tax year 2004, have been considered. It is pertinent to observe here that the Commissioner may amend an assessment order under section 122(1), ITO, and under section 122(2), ITO, a restriction has been imposed upon Commissioner for not amending an assessment order after the expiry of five (5) years from the end of financial year. For elucidation, the aforesaid section 122(2), is reproduced below:-- "(2) No order under subsection (1) shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessment order to the taxpayer." A bare reading of the aforesaid section clearly envisages that after expiry of five years, the Commissioner shall not issue an amended assessment order, whereas in the cases in hand, the amended assessment orders were issued within time before expiry of five years and if observation of the learned ITAT, that cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid law was inserted in the Income Tax Ordinance through Finance Act, 2004, which was supposed to apply to the cases pertaining to the tax year 2005 and onwards, and subsection (4) of Section 177 of the Income Tax Ordinance, 2001, was not applying to the cases selected for audit for the tax year 2004, is assumed true, then function of introducing section 122(2), ITO, supra would become superfluous. Thus, the aforesaid observations of the learned ITAT, are not correct in the eye of law, which cannot be sustained.

9. It is significant to observe here that the learned ITAT also made conflicting observations through the impugned judgment dated 29.09.2011 and 30.11.2011. It reveals from record that the cases, except the case titled Commissioner Inland Revenue v. Muhammad Asif Fancy Garments Rawalakot, were selected for the tax year 2004, wherein, the learned ITAT made the following observations:- "All these cases were selected for audit under section 177(4) of the Income Tax Ordinance, 2001, whereas the aforesaid provision of law was inserted in the Income Tax Ordinance through Finance Act, 2004, which is supposed to apply to the cases pertaining to the tax year 2005 and onwards, thus, subsection (4) of Section 177 of the Income Tax Ordinance, 2001, does not apply to the cases selected for audit for the tax year 2004-" The case titled Commissioner Inland Revenue v. Muhammad Asif Fancy Garments Rawalakot, was selected for the tax year 2005, wherein, the learned ITAT made the following observations:- "Without going into the merits of the case, we propose to conclude the matter on a single point of law. This case was selected for audit under section 177(4) of the Income Tax Ordinance, 2001, requiring taxpayer to explain the details of income. Section 177(4) of the Income Tax Ordinance, 2001 is not applicable to the tax year 2005 because this section was inserted in the Ordinance, through Finance Act, 2004 w.e.f. 01.07.2004." Thus, the aforesaid first observations made in the impugned judgment dated 21.09.2011, that section 177(4) of the Income Tax Ordinance, 2001, was supposed to apply to the cases pertaining to the tax year 2005 and onwards, is contrary to the latter observations made in the impugned judgment dated 30.11.2011, that section 177(4) was not applicable to the tax year 2005. In such state of affairs, the impugned judgments are too liable to be set-aside.

10. As it is evident from record that the learned ITAT, Muzaffarabad, without going into merits of the cases, concluded the matters on the afore discussed single point of law, which has been resolved through the instant judgment by declaring that Commissioner is competent authority to conduct audit under section 177 of the Income Tax Ordinance, 2001; therefore, we are persuaded to remand the cases to the learned ITAT, Muzaffarabad, for having its wisdom on merits of the instant cases.

11. The crux of above discussion is that by accepting the instant References, the impugned judgments of the Income Tax Appellate Tribunal, Muzaffarabad, dated 21.09.2011, 18.10.2011 and 30.11.2011, are hereby set-aside. The cases are remanded to the learned ITAT, Muzaffarabad, for deciding the same on merits in accordance with law. However, as the cases are pending for adjudication since long; therefore, the learned ITAT is directed to decide the same within a period of three months, after receipt of the instant judgment. The copies of the instant judgment shall be annexed with other relevant files. SA/13/HC(AJ&K) Cases remanded.