Audit

Taxpayer assailed notices showing its selection for audit under S. 177 of the Income Tax Ordinance, 2001 ('the Ordinance, 2001')

Argument of the petitioner /taxpayer was that as per Circular dated 05.10.2009 issued by the Federal Board of Revenue, there was no warrant under S. 177 of the Ordinance, 2001 for selection of audit of a taxpayer for multiple years

Validity

Text of S. 177 of the Ordinance, 2001 does not lay down any impediment on the authority of the Commissioner to select the case of a taxpayer for multiple years

All that the provisions in S. 177 require from the Commissioner is to record reasons in writing for calling for record/documents and those reasons are to be communicated to the taxpayer

If these conditions are fulfilled, the Commissioner can select a taxpayer for multiple years

Thus, reliance placed by the petitioner on Circular-in-question is of no help to it

Petitioner ignored the amendments made in S. 177 through Finance Act, 2009 and Finance Act, 2010

Section 177(7) visualizes a situation where audit in a particular year has already taken place and audit for subsequent year would require furnishing of reasonable grounds

This provision is not applicable to selection of audit for multiple years

In the present case, the Commissioner had furnished reasons for calling for record/documents for conducting audit in each of the notice which fulfilled the conditions laid down in the proviso to section 177

No ground for interference by the High Court was made out

Constitutional petition was dismissed.

Petitioner company was aggrieved of proceedings initiated in terms of S. 25 of Sales Tax Act, 1990 and S. 177 of Income Tax Ordinance, 2001 in the wake of Federal Board of Revenue instructions/directions issued to Chief Commissioner and other field formations

Validity

These are independent power of audit of the Commissioner and FBR with separate methodology enumerated in law

Commissioner, under S. 177 of Income Tax Ordinance, 2001 and S. 25 of Sales Tax Act, 1990 is required to apply his independent mind to each taxpayer's individual case and if he decides to select a taxpayer for audit, he must give mindful and legitimate reasons arising out from record

On the other hand, purpose of S. 214-C of Income Tax Ordinance, 2001 and S. 72-B of Sales Tax Act, 1990, is to ensure general compliance of law by taxpayers

Federal Board of Revenue under S. 214-C of Income Tax Ordinance, 2001 and S. 72-B of Sales Tax Act, 1990 may select a person for audit through random parametric ballot

There was no room in S. 214-C of Income Tax Ordinance, 2001 or S.72-B of Sales Tax Act, 1990 for FBR to direct Commissioner to select assessee for audit under S. 177 of Income Tax Ordinance, 2001 or S. 25 of Sales Tax Act, 1990

Such direction amounted to usurping independent power of Commissioner under S.177 of Income Tax Ordinance, 2001 and S. 25 of Sales Tax Act, 1990

Federal Board of Revenue interfered in independent statutory duty and discretion of Commissioners under S. 177 of Income Tax Ordinance, 2001 and S. 25 of Sales Tax Act, 1990

Federal Board of Revenue not only gave directives to initiate sector wise audit across the board but also gave the authorities time lines for various steps commencing from selection for audit till passing of assessment orders

Such time line interfered with independent power of Commissioners, who might or might not have selected individual tax payers for audit on the basis of their income tax or sales tax returns on individual basis

Division Bench of High Court declared that income tax and sales tax audit proceedings initiated on the basis of directives issued by FBR were without lawful authority and of no legal effect

Commissioner concerned was not precluded from exercising his/her independent authority under S. 177 of Income Tax Ordinance, 2001 and S. 25 of Sales Tax Act, 1990 to proceed afresh in individual cases strictly in accordance with law

Constitutional petition was allowed accordingly.

Purpose of audit is to ensure that taxpayer has complied with relevant fiscal laws and instructions issued by Fiscal Regulator i.e. Federal Board of Revenue

Audit is not meant to conduct a roving and fishing inquiry into the affairs of any taxpayer in order to fish for default.

Purpose of audit is to ensure that taxpayer has complied with relevant fiscal laws and instructions issued by Fiscal Regulator i.e. Federal Board of Revenue

Audit is not meant to conduct a roving and fishing inquiry into the affairs of any taxpayer in order to fish for default.

Substituted subsection (6) and newly inserted subsection (6A) of S. 177 of the Income Tax Ordinance, 2001, applicability of

Retrospective effect

Scope

Department filed reference against the judgment passed by the Appellate Tribunal Inland Revenue in favour of the taxpayer/respondent, with the plea that the applicability of substituted subsection (6) and newly inserted subsection (6A) of S.177 of the Income Tax Ordinance, 2001, was retrospective

Validity

Taxpayer / respondent was selected for audit on 09.05.2019 whereas Show-Cause Notice proposing to amend assessment under S.122 of Income Tax Ordinance, 2001 ('the Ordinance 2001'), was issued to the respondent on 25.02.2021

Perusal of the Show-Cause Notice clearly indicated that audit proceedings were still pending and no audit report was issued by the Department till the amendments-in-question were made in S. 177 of the Ordinance, 2001 through Finance Act, 2019

There was nothing available on record to show what substantive right, if any, had accrued in favour of the applicant / department on 01.07.2019 when the amendment made through Finance Act, 2019, in S. 177 of the Ordinance, 2001 in the form of substitution of subsection (6) and insertion of subsection (6A) became effective which adversely affected the applicant / Department

Said provisions became effective from 01.07.2019; subsection (6) of S. 177 of the Ordinance 2001 made it mandatory for the Commissioner, upon completion of the audit, to obtain taxpayer's explanation on all the issues raised in the audit and after that issue an audit report containing audit observations and findings

There is nothing in the language of the said provision which suggests retrospective application of the same; it means that cases where vested rights have accrued or transaction has been closed because of completion of audit prior to the said amendment, the requirements stipulated through substituted subsection (6) cannot be pressed into service

However, there is nothing in the language of subsection (6) of S. 177 of the Ordinance, 2001, which restricts application of the said provision to cases where audit was pending completion or still underway on 01.07.2019, which is the case here

Likewise, there is nothing in the text of the said provision that restricts its application to the cases selected for audit after any particular tax year

Indeed, the date of selection for audit hardly provides any basis for regulating applicability of the amended subsection (6) of S. 177 of the Ordinance, 2001, which clearly would apply to all cases where audit was yet to be completed after the said enactment

Thus plea rendered by the applicant qua retrospective application of said subsection (6) was wholly misconceived and untenable

Questions raised by the applicant/department were answered against the applicant/department and in favour of the respondent / taxpayer

Reference application filed by the Department was dismissed.

Authorities were aggrieved of order passed by Appellate Tribunal Inland Revenue setting aside amendment of assessment order

Validity

If audit was conducted and discrepancies were noted by Taxation Officer, that would clearly constitute definite information to clothe Taxation Officer with the power to amend or further amend assessment order in respect of a tax year

Appellate Tribunal Inland Revenue relied upon extraneous circumstances to uphold order of Commissioner (Appeals) in stating that there was no definite information with the department for amendment of assessment order

High Court decided question of law in favour of authorities as Taxation officer issued notice in terms of S.122(9) to respondents / taxpayers who had power to pass order of amendment of assessment

Reference was allowed, in circumstances.

Direct invoking of S. 161 without recourse to audit under S.177 is bad in law.

Said section could not be given retrospective effect.

Said section could not be given retrospective effect.

Main goals sought to be achieved from audit include determination of accuracy of tax return in relation to tax liability and assessment by taxpayer, to review taxpayer's records to ascertain compliance with relevant tax laws; and to promote voluntary compliance and monitoring thereof.

Statutory requirement is that an audit report is to be issued and thereafter the taxpayer is to be afforded an opportunity of a hearing.

Respondent was selected for audit and the department had every right to conduct such an exercise, within the remit of the law

No audit report was issued to the respondent containing audit observations

Reasonable opportunity of hearing was not provided to the respondent

Such was done considering the time constraint for completion of audit proceedings

Conduct of the department, subjecting a taxpayer to arbitrary adversarial orders merely to circumvent the constraints of limitation, could not be appreciated

Reference application was dismissed.

Petitioner assailed its selection for audit vide impugned notice on the premise that the selection did not fulfill the criteria of S.177(7) of the Income Tax Ordinance, 2001

Contention of petitioner was that there were no reasonable grounds to call for the audit since a similar exercise was carried in respect of a period preceding the period denoted vide the impugned notice

Validity

Obligation of a person to pay the correct quantum of tax meant that a vested right had accrued to the State to examine the books of the taxpayer since the audit of accounts was the most effective way of determining the correct tax liability

Selection of petitioner for audit in respect of previous tax years did not preclude the department from initiating audit proceedings for a subsequent year, especially in view of S.177(7) of Income Tax Ordinance, 2001

No case was set forth to suggest that the grounds invoked for audit were not reasonable

Case of the petitioner was not that any vested constitutional rights had been infringed by its selection for audit

Constitutional petition was dismissed.

Statutory framework of audit coupled with the overarching umbrella of constitutional guarantees furnishes adequate and sufficient safeguards to the taxpayer; hence, the lawful exercise of the power to conduct an audit cannot be denied.

Where the notice provides sufficient reasoning for selection of a case for audit, the law did not provide for a voir dire upon the taxpayer's objections to the rationale invoked

Taxpayer remains at liberty to avail the statutory hierarchy if aggrieved by the conclusion of the audit proceedings.

Commissioner under S.177 of Income Tax Ordinance, 2001, is required to apply his mind and provide reasons for selection, whereas Federal Board of Revenue under S.214C of Income Tax Ordinance, 2001, may select a person through random parametric ballot

If a taxpayer is not selected in balloting then Federal Board of Revenue cannot direct Commissioner to select a taxpayer for audit as the same would defeat entire legislative scheme separating powers of the Commissioner and Federal Board of Revenue in relation to audit selection by directing Commissioner to select certain taxpayer for audit.

Department assailed order passed by Commissioner (Appeals) whereby order of assessing officer amending the deemed assessment was set aside

Validity

Amended assessment was framed on presumption and without adhering to audit procedure

Assessing officer had not confronted the taxpayer with the contents of the audit report before amending the assessment order or even before issuance of notice under S.122(9) of the Income Tax Ordinance, 2001

Subsection (5) of S.122 of the Income Tax Ordinance, 2001, allowed amendment of assessment only when the department was in possession of 'definite information' and not otherwise, and in that context, the assessing officer was under legal obligation to specifically identify the nature of suppressed income and issue notice in terms of Cls. (i), (ii) and (iii) of subsection (5) of S.122 of Income Tax Ordinance, 2001, highlighting the facts under which category of taxpayer's case fell

Non-issuance of such notice clearly meant that while passing the amended assessment order, assessing officer was not in possession of 'definite information' and the reason assigned for additions/disallowances, while passing the amended assessment order, could not be termed as based on 'definite information'

Appellate Tribunal found no illegality or infirmity in the order of the Commissioner (Appeals), which was maintained

Appeal was dismissed.

Assessing officer, after formulation of the audit report/audit observation/objections/charge sheet, ought to first confront the same to the taxpayer and secondly, after considering the explanation of the taxpayer, if he considers that assessment order is required to be amended on the basis of 'definite information', he may invoke subsection (1) of S.122, Income Tax Ordinance, 2001 for acquiring jurisdiction to amend the order under subsection (4) read with subsection (5) as the case may be.

Deemed assessment, if selected for audit, may be amended by invoking jurisdiction under S.122(1), Income Tax Ordinance, 2001, subject to fulfillment of conditions as envisaged under subsection (6) of S.177, Income Tax Ordinance, 2001, after fulfilling the pre-requisite/requirement of "definite information" under subsection (5) of S.122 and subject to execution of conditions of clauses (i), (ii) and (iii) of S.122(5) of Income Tax Ordinance, 2001.

Assessing officer, before invoking the provisions of S.122, Income Tax Ordinance, 2001, has to frame charge sheet/audit observation/audit report and the same ought to be communicated to the taxpayer for rebuttal and the explanation/reply/assertion/contention/objection of taxpayer must be obtained and considered

Assessment order can only be amended by acquiring jurisdiction and fulfilling all the requirements of subsections (1) and (5) of S.122, Income Tax Ordinance, 2001

Mere (firstly) issuance of notice under S.122(9), Income Tax Ordinance, 2001, read with S.122(1), Income Tax Ordinance, 2001, after selection for audit and before conducting audit of the taxpayer, does not fulfill the requirements of law

Assessing officer first has to reject the objections/rebuttal of taxpayer on audit report and then acquire jurisdiction under S.122(1), Income Tax Ordinance, 2001 and then under S.122(5), Income Tax Ordinance, 2001.

Audit proceeding under S.177, Income Tax Ordinance, 2001, is only a procedure/mode and method to find out some defects in the accounts and to obtain information to further enter into the jurisdiction under S.122(1), Income Tax Ordinance, 2001, for making an amended assessment after acquiring authority on the basis of "definite information"

Section 177, Income Tax Ordinance, 2001, is just a process/mode and method and prescribed path to reach to conclusion as to from where the assessing officer can further modify an already assessed income.

Section 177 of Income Tax Ordinance, 2001, does not in itself provide any power or absolute empowerment to modify assessment or re-determine the income of taxpayer

Key point to be kept in mind is that it is not a return of income which is being processed by the assessing officer; Assessing officer deals with an 'assessment order' which by process of law has acquired a sanctity

Finalized assessment, therefore, cannot just be modified or disturbed in continuation of the proceedings of audit under S.177 of Income Tax Ordinance, 2001.

Commissioner after completion of audit shall issue audit observations and findings and then after issuing audit report he may amend the assessment order after providing opportunity of hearing to the taxpayer.

Assessing officer by considering the difference between declared receipts and Bank credit entries as suppressed income had added the income without proving exact nexus of the transactions

Neither the assessing officer nor the CIR (Appeals) had made any observation on the explanation of the taxpayer that the disputed transactions were made for personal use

Only information for the purpose of 'definite information' that the assessing officer possessed was the difference in amount between declared receipts and credit entries

Requirements of S.122(5) of Income Tax Ordinance, 2001, were not met

After completion of audit, the authority had to issue an audit report, containing all the issues raised in audit and to provide an opportunity to settle the said issues prior to commencement of amendment proceedings

Language of subsection (6) of S. 177 was express, explicit and mandatory to the effect that the Commissioner could amend the assessment only after obtaining taxpayer's explanation on all the issues raised in the audit report

Confrontation on the issues raised in audit was mandatory and sine qua non, in absence whereof the judicial proceedings could not be triggered or commenced

Assessing officer had failed to comply with the mandatory provisions relating to audit proceedings and amendment, therefore, the additions and disallowances were annulled

Appeal was allowed.

Taxation officer issued show-cause notice under S.122(9), Income Tax Ordinance, 2001, for confrontation of amended assessment

Taxation officer found the reply of taxpayer to be unsatisfactory and amended the tax liability

Commissioner (Appeals) remanded the matter to the taxation officer for de-novo consideration

Validity

Case of taxpayer was selected for audit on 18-01-2018 and the amended assessment was framed on 28-09-2018, which was hit by limitation because the assessment was not completed within the same financial year

No justification was found in the order of the Commissioner (Appeals) for remanding the matter to the taxation officer

No notice under Ss.111 & 174(2) of Income Tax Ordinance, 2001 were issued to the taxpayer nor was it specifically confronted with proposed addition so that it could have offered some explanations in that regard

Additions made by the taxation officer under Ss.111 & 174(2) of Income Tax Ordinance, 2001 were without lawful authority

Order passed by Commissioner (Appeals) was vacated and the order under S.122(1) of the Income Tax Ordinance, 2001 was annulled

Appeal filed by taxpayer was allowed.

Federal Board Revenue is devoid of authority to direct Commissioners as to how to exercise discretionary authority under S.117(1) of Income Tax Ordinance, 2001, in relation to select taxpayers and does not have subject matter jurisdiction to issue such orders.

Object of vesting audit selection powers in Commissioner under S.177(1) of Income Tax Ordinance, 2001 are different from the object of vesting audit selection powers in FBR under S.214-C of Income Tax Ordinance, 2001

Exercise of powers by Commissioner under S.177(1) of Income Tax Ordinance, 2001 are always on subjective basis in view of an individual taxpayer's returns and history of compliance or non-compliance with provisions of Income Tax Ordinance, 2001

Exercise of audit selection powers by Federal Board of Revenue (FBR) under S.214-C of Income Tax Ordinance, 2001, are meant to be exercised on an objective basis for larger policy purposes.

Petitioners / taxpayers assailed notices issued for purposes of audit under S.177(1) of Income Tax Ordinance, 2001, S.25 of Sales Tax Act, 1990 and S.46 of Federal Excise Act, 2005

Validity

FBR could exercise its audit powers on objective basis under S.214-C of Income Tax Ordinance, 2001, in the manner prescribed, but could not force hand of Commissioners to exercise their subjective powers under S.177(1) of Income Tax Ordinance, 2001 to trigger audit of taxpayers effectively selected by FBR

Notices to some petitioners / taxpayers who were oil marketing companies were issued by Commissioner under S.177(1) Income Tax Ordinance, 2001 in view of circular issued by FBR

Exercise of authority by Commissioner in such manner was based on extraneous consideration not contemplated by S.177(1) of Income Tax Ordinance, 2001

Fact that Commissioner, in compliance with direction of FBR, selected certain petitioners / taxpayers for audit and then documented reasons for purposes of S.177(1) of Income Tax Ordinance, 2001, had established that such taxpayers were not selected after independent application of mind by Commissioner for reasons that could be deemed reasonable for purposes of S.177(1) of Income Tax Ordinance, 2001

Audit selection notices issued under S.177(1) of Income Tax Ordinance, 2001, in compliance with circulars issued by FBR under S.206 of Income Tax Ordinance, 2001 were based on extraneous considerations

Such exercise of discretion controlled and directed by FBR suffered from legal infirmity

FBR was vested with no authority under S.206 read with Ss. 213 & 214 of Income Tax Ordinance, 2001 or any provision of Sales Tax Act, 1990 or Federal Excise Act, 2005 to issue directive or circular to Commissioners directing them to undertake sectoral audits or otherwise bind them in terms of how they were to exercise their discretionary authority under S.177(1) of Income Tax Ordinance, 2001 or S.25(1) of Sales Tax Act, 1990 or S.46 of Federal Excise Act, 2005

Any such directive was devoid of justification and a nullity

Audit selection notice issued by Commissioner under S.177(1) of Income Tax Ordinance, 2001 to Oil Marketing Company on the basis of sectoral audit directive issued by FBR was tantamount to a notice issued for extraneous reasons and was liable to be set-aside

Audit proceedings initiated on the basis of a directive issued by FBR having been declared to be void would also be devoid of lawful authority and would cease

Such proceedings did not inhibit Commissioner from independently exercising his/her authority under S.177 of Income Tax Ordinance, 2001 on the basis of reasons that satisfied requirements of S.177 of Income Tax Ordinance, 2001

Constitutional petition was disposed of accordingly.

Ss. 8 & 15 [as amended by Auditor General's (Functions, Powers and Terms and Conditions of Service) (Amendment) Act, 2017]

Constitution of Pakistan, Art. 170(2)(f)

Public sector enterprise

Audit

Dispute was with regard to audit of petitioner company which was a private limited company controlled and run by Provincial Government

Validity

Petitioner was though a private limited company, registered under Companies Ordinance, 1984, but it was owned and established by Government of Balochistan and funded through Provincial Consolidated Fund

Audit of accounts of government owned company was to be carried by Auditor General, therefore, audit of petitioner company was also the responsibility of Auditor General of Pakistan

High Court directed Auditor General to carry audit of petitioner company initially with effect from year 2017 and onwards whereas in second phase audit of petitioner should be conducted from the date of its establishment till year 2017

Constitutional petition was dismissed accordingly.

Applicant assailed order passed by Appellate Tribunal whereby it had declared the selection of taxpayer's case for audit under S.177(4) (a) & (d), Income Tax Ordinance, 2001, as illegal

Validity

High Court, with the consent of parties, sent the case to the department for complying with the directions of Supreme Court given in 'Chairman, FBR and others v. Idrees Traders and others' reported as 2012 PTD 693 wherein department was directed to follow the policy in letter and spirit and to provide sufficient opportunity of hearing to the taxpayer

Reference application was disposed of accordingly.

Directorate General of Revenue Receipt Audit cannot conduct audit of a person registered under the Sales Tax Act, 1990 and superstructure built on such audit is coram non judice.

Tax regulators monitor self-assessment system through neutral and impartial tool of audit under Ss. 25 & 72B of the Sales Tax Act, 1990 and there is no other mechanism under the Sales Tax Act, 1990 to lift the veil of self-assessment, protecting the monthly tax return filed by the taxpayer.

Amendment of any assessment under S.122(5) of Income Tax Ordinance, 2001, was allowed only when authorities were in possession of "definite information" and not otherwise

Deputy Commissioner Inland Revenue was under legal obligation to specifically identify the nature of suppressed income and was to issue notice in terms of S.122(5)(i)(ii) & (iii) of Income Tax Ordinance, 2001, highlighting the fact under which category case of taxpayer fell

Non-issuance of such notice meant that while passing amended assessment order Deputy Commissioner Inland Revenue was not in possession of "definite information"

Reason assigned for additions / disallowances while passing amended assessment order were not termed as "definite information"

Audit under S.177(6) of Income Tax Ordinance, 2001, was void ab-initio and was not in accordance with law having no legal effect

Amendment under S.122(1) of Income Tax Ordinance, 2001, without fulfilling legal requirement of S.177(6) of Income Tax Ordinance, 2001, was without jurisdiction or in excess of jurisdiction

Amendment proceedings initiated and notice under S.122(9) of Income Tax Ordinance, 2001, issued prior to conduct of audit was ab initio void

No proper and valid notice was issued under S.122(5) of Income Tax Ordinance, 2001, and no notice issued under which clause Deputy Commissioner Inland Revenue had amended the order under S.122(5) of Income Tax Ordinance, 2001 and what was the specific 'definite information'

No specific, separate and independent valid notice under S.111 of Income Tax Ordinance, 2001, was issued for additions under S.111(1)(a) & (c) of Income Tax Ordinance, 2001

No unexplained income or expenditure was proved by Deputy Commissioner Inland Revenue without any shadow of doubt

Appeal was allowed, in circumstances.

Provision of S.177 of Income Tax Ordinance, 2001, does not provide any power or absolute empowerment to modify assessment or re-determine income of taxpayer

Key point which has to be kept in mind is not a return of income which is being processed by Commissioner Inland Revenue / Deputy Commissioner Inland Revenue/Officer Inland Revenue, selecting and thereafter conducting / doing audit

By process of law, assessment order acquires a sanctity

Finalized assessment cannot just be modified or disturbed in continuation of proceedings of audit under S.177 of Income Tax Ordinance 2001

Authorities after selection and conducting audit have to give in every case, the taxpayer all charges / objection / issues raised in audit against taxpayer such as to enable him to answer / explain them before invoking provision of S.122 of Income Tax Ordinance, 2001 and after obtaining and considering explanation of taxpayer on audit objections, only thereafter, if authorities may consider necessary

Commissioner Inland Revenue / Deputy Commissioner Inland Revenue /Officer Inland Revenue may amend assessment under S.122(1) (4) & (5) of Income Tax Ordinance, 2001, after fulfillment of further conditions of S.122 (5)(i),(ii) or (iii) of Income Tax Ordinance, 2001.

Deposits in question were explained but on the other hand were not subtracted from the total amount confronted and added under S.111 of Income Tax Ordinance, 2001

Authorities admitted inflow of amount in question but the amount was added without any rhyme or reason unlawfully and illegally

When inflow was explained, admitted and notice on that point was withdrawn by the authorities then neither gross inflow or accretion in asset could be added as unexplained as the same was outcome of the inflow which had been accepted by authorities

Nature and source of all credit entries were explained by taxpayer and no addition was warranted under S.111 of Income Tax Ordinance, 2001

Authorities proceeded unlawfully and made all addition illegally under S.111 of Income Tax Ordinance, 2001, even when nature and source of deposits was explained

Appellate Tribunal Inland Revenue directed the authorities to accept the declared version of taxpayer and had set aside the orders passed by two forums below

Appeal was allowed, in circumstances.

Importer was aggrieved of show cause notice issued by authorities to recover Federal Excise Duty, Sales Tax and Income Tax

Validity

No official of Directorate of PCA was empowered to conduct audit in the matter of Federal Excise and Income Tax without powers / justification

Any such audit was void ab-initio and coram non judice

Clearance Collectorates did not have authority to collect Federal Excise Tax, Sales Tax and Income Tax at import stage in the capacity of collecting agent in terms of S.3 of Federal Excise Act, 2005, S.6 of Sales Tax Act, 1990 and S.148 of Income Tax Ordinance, 2001, sans recovery proceedings

Clearance Collectorates were empowered to recover escaped / short paid customs duty and regulatory duty levied on imported goods under S.18 of Customs Act, 1969, in exercise of powers conferred under S.202 of Customs Act, 1969, after due process of law but had no powers in any case to adjudicate cases of short recovery of Federal Excise Duty, Sales Tax and Income Tax under S.14 of Federal Excise Act, 2005, S.36 of Sales Tax Act, 1990 and S.162 of Income Tax Ordinance, 2001

No charges were levelled under S.32(2) of Customs Act, 1969, against those officials confirming the case in question was of inadvertence, error, omission or misconstruction falling within the ambit of S.32(3) of Customs Act, 1969

Appropriate authority to adjudicate such type of cases rested with Principal Appraiser in terms of Sr. 3(ii) of SRO No.371(I)/2002, dated 15-6-2002 and not Additional Collector Adjudication

Such show cause notices and order-in-original was without power / jurisdiction and the same was ab initio void and coram non judice

Importer was met out with partial treatment which was tantamount to discrimination not permitted under Arts. 4 & 25 of the Constitution

Customs Appellate Tribunal set aside the show-cause notice issued to importer as the orders passed by authorities were ab initio, null and void

Appeal was allowed, in circumstances.

Assessing officer disallowed the claim of exemption/tax credit of appellant on the grounds that Cls. 92 & 58A of Part I of Second Schedule to the Income Tax Ordinance, 2001, were omitted and the appellant had failed to fulfill the conditions laid down in S. 100C for 100% tax credit

Appeal filed before Commissioner (Appeals) was dismissed

Appellant claimed the status of non-profit organization and possessed an approval under S.2(36)(c) of Income Tax Ordinance, 2001

Validity

Income of a University run by a non-profit organization was eligible for tax credit under S.100C(2)(d), subject to the conditions laid down in S.100C(1) of Income Tax Ordinance, 2001

Scheme of tax credit first required determination of taxable income and tax liability of such non-profit organization or University

Section 100C, Income Tax Ordinance, 2001, also provided tax credit against minimum tax and final taxes which meant that such entities were liable to taxes if such entities did not get exemption certificate under S.159(1)(c) of Income Tax Ordinance, 2001

Appellant could neither produce an exemption certificate nor any supporting evidence to show that it fulfilled the conditions laid down in S.100C(1) of Income Tax Ordinance, 2001

Assessing officer, on the other hand, had invoked S.122(5A), Income Tax Ordinance, 2001, to tax the appellant which was beyond the scope of said section as determination of taxable income, tax liability and tax credit required detailed enquiries and investigation

Assessing officer had erred in levying tax on gross declared receipts of the appellant which was illogical because if the appellant was not eligible for exemption or for tax credit then it was still eligible for treatment as a University being run for profit, where expenses incurred were allowed against gross receipts

Orders passed by officers below were not sustainable

Appellate Tribunal remanded the matter to the officer authorized under S.177, Income Tax Ordinance, 2001, to make proper investigations

Appeal was disposed of accordingly.

Petitioners/ taxpayers impugned notice under S.214D(a) for selection for audit on basis of income tax return not filed within time

Contention of petitioners' inter alia was that they applied for an extension in time under S. 119 of the Income Tax Ordinance, 2001 and filed the returns within such extended time, and were therefore not liable to be selected for audit

Validity

Crucial concept underpinning S.119 of the Income Tax Ordinance, 2001 was that the Commissioner shall grant extension in time "by order in writing" and the same was crucial since the Commissioner had to form on an opinion on being satisfied that condition precedent existed and to specify a period for which such time was granted

Petitioners, in the present case, could not be given leeway of assuming both such aspects were in their favour and they were not conveyed in writing any extension in time and their implication that same was granted was misplaced and untenable

Failure of Commissioner to decide an application for extension of time by necessary inference would mean that the extension in time sought, was not granted

Constitutional petitions were dismissed, in circumstances.

No power has been provided under S. 177 of Income Tax Ordinance, 2001 to modify assessment or re-determine income of taxpayer

Audit is not a return of income which is being processed by officer doing audit

Audit officer is dealing with 'deemed assessment' which by process of law has acquired sanctity

Finalized assessment cannot just be modified or disturbed in continuation of proceedings of audit under S. 177 of Income Tax Ordinance, 2001

Audit is just a process to reach to a conclusion from where assessing officer can further modify an already assessed income.

Legislative history.

Deputy Collector of Customs (Appraisement) passed reassessment order after a lapse of 10 months and created recovery by amending the existing assessment order

Validity

Legislature had inserted S.3DD in Customs Act, 1969 through which Directorate General of Post Clearance Audit was created and its officers were delegated powers through S.R.O. No.500(I)/2009 dated 13-06-2009 for conducting audit of import books of account which included every aspect of declaration made by the importer and assessment order passed by the competent authority

Directorate General of Post Clearance Audit could prepare audit observation and forward it to the importer for clarification and if the reply failed to settle the issue frame contravention report and forward it to the Clearance Collectorate which shall forward it to the respective Collectorate of Customs Adjudication for issuance of show-cause notice and passing of order-in-original

Deputy Collector of Customs (Appraisement) assumed the jurisdiction of Directorate General of Post Clearance Audit under S.26A, Customs Act, 1969

Only course left for the Deputy Collector of Customs (Appraisement) was to file an appeal before Collector of Customs (Appeals)

Deputy Collector of Customs (Appraisement), instead of the prescribed method, reopened the assessment/clearance order under S.195, Customs Act, 1969 which powers were either vested with the Federal Board of Revenue or the Collector of Customs

No appeal had been filed against the assessment order within the stipulated period of 30 days resultantly, it attained finality and could not be disturbed being a past and closed transaction.

Provisions relating to audit are germane to assessment of taxable income of assessee and are machinery provisions which should be construed in a manner which makes the machinery procedure workable

Audit provisions being machinery provisions, should be liberally construed to ensure that regulatory powers which are designed to keep a check on taxpayers and facilitate recovery of amounts which are lawfully due and payable to State are paid fairly, honestly and transparently

Such provisions are not to be rendered redundant, ineffective and illusionary on basis of technicalities.

Taxpayer receiving notice from Commissioner calling for his record for purposes of audit and at same time being selected by Federal Board of Revenue for computerized, random or parametric balloting, only one audit would be conducted as procedure for conducting audit is same in both instances.

Power of Commissioner under S.177, Income Tax Ordinance, 2001 is independent and exercisable subject in a different set of conditions on basis of record before him as compared to powers available to Federal Board of Revenue in terms of S.214-C of Income Tax Ordinance, 2001 which are not record based, consists of power to select by random or parametric ballot and not subject to same conditions, checks, balances and an obligation to confront and disclose reasons and provide opportunity to taxpayer to defend himself as have been imposed on Commissioner

Such are two independent powers, fundamentally different in nature, genesis, origin, antecedents and conditions and can coexist independently and be exercised independent of each other but are not mutually exclusive and are not meant to be so as clearly and unambiguously declared by legislature by way of Explanation inserted through Finance Act, 2013

No conflict or inconsistency existed between S.177 & S.214-C of Income Tax Ordinance, 2001 and does not require any reconciliation.

Audit in itself was not an adverse action and / or order; particularly in a system where tax return was filed by taxpayer under self-assessment, which was to be treated as an assessment order of the Commissioner under S.120 of the Income Tax Ordinance, 2001

Conduct of audit was not even an inconvenience if taxpayer fulfilled its statutory duty by maintaining record under the Income Tax Ordinance, 2001.

Sections 26-A & 32(3-A) of the Customs Act, 1969 had been inserted in the Act after creation of Directorate General of Post Clearance Audit through insertion of S.3-DD in the Act; officials of which were delegated powers under different provisions of said Act, including Ss.26-A & 32(3-A), through S.R.O. No.500(I)/2009, dated 13-6-2009

Officials of the Directorate of Post Clearance Audit were empowered to conduct audit of the goods declarations of the importer; post clearance and upon finding any discrepancy or misdeclaration were empowered to issue audit observation to the importer for justification

If the importer failed to justify the pointed out discrepancy/misdeclaration, the Director of Post Clearance Audit was empowered to frame contravention report under the provision of S.32(3-A) of the Customs Act, 1969 and forward the same to the respective-Collector of Customs, (Adjudication) for commencing proceedings

In the present case, officials of customs conducted the audit under S.26-A and prepared contravention report under S.32(3-A), while usurping the powers of the Directorate General of Post Clearance Audit, which was not permitted under law

Appellate Tribunal observed that any such act, if committed, had to be discouraged in the beginning because, if allowed, it would create anarchy and compromise the independence of the different organs of the Revenue Division, empowered to act and operate within the specific sphere without any interference

Customs officials, in circumstances, had acted without power/jurisdiction, rendering the conduction of audit, preparation of contravention report, ab initio void and of no legal effect.

Appellant/ Commissioner Inland Revenue, sought condonation of delay of 37 days in filing of intra-court appeal, on the ground, inter alia, that the procedural constraints required permission to be sought from the Department, which caused delay

Validity

Said reason was neither cogent nor confidence inspiring and in time-barred proceedings, defaulting party must explain delay of each day caused in preferring valid proceedings in accordance with law and the same was not done in the present case

Sufficient cause must be shown by person seeking condonation of delay, which meant "circumstances beyond control of the party concerned", and nothing shall be deemed to have been done in good faith which was not done with due care and attention

High Court observed that for purposes of limitation, Government (departments) could not be treated differently

Intra-court appeal being barred by time, were dismissed, accordingly.

Scope of power of Commissioner to conduct audit under S. 120(1A) of the Income Tax Ordinance, 2001 distinguished from selection by Board for audit under S. 214C of the Income Tax Ordinance, 2001

Question before the High Court was whether Commissioner's power to conduct audit of any person under S. 120(1A) of the Income Tax Ordinance, 2001 was solely dependent upon Board's decision to select persons for audit under S. 214C of the Income Tax Ordinance, 2001 or could the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 make such a selection on his own discretion"

Held, that S. 120(1A) of the Income Tax Ordinance, 2001 vested in the Commissioner the power to select a person for audit if there existed reasonable grounds for doing so, irrespective of the fact that section 120(1A) of the Income Tax Ordinance, 2001 mentioned the words "conduct audit" and not to select a person for audit" and such power to conduct audit was granted to the Commissioner so that where he felt necessary, he could bring any assessment under scrutiny and it would be impossible to do the same if such power was considered to be solely dependent upon selection of persons by the Board under S. 214C of the Income Tax Ordinance, 2001

Second proviso to S. 177 of the Income Tax Ordinance, 2001 prohibited the Commissioner from conducting audit after expiry of six years whereas no such prohibition existed when persons were selected for audit under S. 214C of the Income Tax Ordinance, 2001

Limitation contained in second proviso of section 177 of the Income Tax Ordinance, 2001 was applicable to selection made by the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 but no such limitation was applicable when random selection was made under S. 214C of the Income Tax Ordinance, 2001 and the same showed that there exited two distinct provisions of the Income Tax Ordinance, 2001 on basis of which persons could be selected for audit, one was circumscribed by period of limitation and the other was not Power of the Board to choose persons for audit under S. 214C of the Income Tax Ordinance, 2001 was a general power which was in addition to power of the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 and if the Commissioner was unable to conduct audit under said Section, then there would not exist any provision in the Income Tax Ordinance, 2001 which would facilitate the taxing authority to examine a tax return in case circumstances suggested conducting a person-specific audit and same could never be the intention of the Legislature

No provision of the Income Tax Ordinance, 2001 suggested that power to select a person for audit only vested with the Board

High Court observed that after examination of Ss. 120(1A), 122(5), 177 & 214C of the Income Tax Ordinance, 2001 it was clear that law visualized two distinct situations for conducting audit; and first was provided under S. 120(1A) of the Income Tax Ordinance, 2001 which was based on exercise of discretion on part of Commissioner and the other was the power of the Board to select persons or class of persons under S. 214C of the Income Tax Ordinance, 2001

Under S. 120(1A) of the Income Tax Ordinance, 2001 any person could be called upon by the Commissioner in his discretion to submit accounts for audit if reasonable grounds existed for doing so

Constitutional petitions were dismissed, in circumstances.

Assessees assailed show cause notices issued to them for conducting of their audit against the returns filed under Self-Assessment Scheme

Single Judge of High Court dismissed the petition filed by assessees

Validity

Powers of Commissioner under S. 177 of Income Tax Ordinance, 2001, were not subservient to the powers of Federal Board of Revenue, under S. 214-C of Income Tax Ordinance, 2001

Powers under both the provisions were exclusive and independent of each other

Scope of power of Commissioner under S. 177 of Income Tax Ordinance, 2001, were circumscribed by the checks and limitations which had been imposed by legislature

Power to select a person under S. 177 of Income Tax Ordinance, 2001, exclusively vested in Commissioner and the same had to be exercised within the scope determined therein

Power of Commissioner to call for record and conduct audit under S.177 of Income Tax Ordinance, 2001, did not require any pre-selection process by the Board

Division Bench of High Court, in intra court appeal, declined to declare provisions of S. 177 of Income Tax Ordinance, 2001, to be in violation of Art. 10-A, 25 or 18 of the Constitution

Notices in questions either did not disclose reasons based on criterion determined by Commissioner or no reason had been mentioned

High Court directed the Commissioner to afford an opportunity of hearing to each assessee and thereafter pass speaking order and judgment passed by Single Judge of High Court was set aside

Intra Court Appeal were allowed accordingly. Chenone Stores Limited through Executive Director (Finance Accounts) v. Federal Board of Revenue through Chairman and 2 others 2012 PTD 1815 and Northern Bottling Company Limited v. Federation of Pakistan 2013 PTD 1552 dissented from.

Board as well as Commissioner are empowered to conduct audit of the record and documents of any person registered under Federal Excise Act, 2005, once a year after giving advance notice in writing

Requirement of giving advance notice in writing includes giving reasons for selection of a person for audit

Such power, if exercised by Commissioner, is not dependent on a pre-selection to be made by the Board under S. 42-B of Federal Excise Act, 2005

Notice in writing required to be given in advance under S. 46 of Federal Excise Act, 2005, has to give reasons.