Selection for audit

Provision of S. 214D of Income Tax Ordinance, 2001, under which subject notice was issued, was omitted by Finance Act, 2018 which took effect on 22-05-2018 while subject notice was issued on 08-11-2018 when the provision was no more in field

No right had accrued in favor of authorities at the time of issuance of notice in question

Selection for audit was not automatic or forthwith triggered upon happening of an event of default, as envisaged by S. 214A of Income Tax Ordinance, 2001 but upon latest discovery of information, incidentally when relevant provision of law was not available on the statute book

High Court declined to interfere, as the authorities failed to point out any illegality or legal infirmity in order passed by Appellate Tribunal Inland Revenue, which was well-founded

Reference was dismissed, in circumstances.

Plea raised by petitioners/ taxpayers was that before selection of case for audit Commissioner was required to call for record or documents from taxpayer and to communicate to him reasons for doing so

Validity

Selection for audit under original S.177 of Income Tax Ordinance, 2001, was subject to fulfillment of certain conditions as enumerated in cls. (a) to (d) of the then S.177 (1) of Income Tax Ordinance, 2001

Conditions were omitted from S. 177 of Income Tax Ordinance, 2001, as substituted through Finance Act, 2010 and instead requirement of giving reasons for calling of record / documents was imposed on Commissioner through proviso to S.177 (1) of Income Tax Ordinance, 2001

Commissioner was then liable to give reasons for summoning of record and proceedings with the audit

Selection for audit per se did not saddle taxpayers with any liability

Such selection did not constitute an actionable injury to taxpayers entitling them to challenge the same in a Court of law

Audit was a much wider exercise than amendment of assessment

If assessment was to be amended in the course of audit the taxpayers had remedy to challenge the same by resorting to remedies of multiple appeals / references available under Income Tax Ordinance, 2001

Commissioner in the notices gave reasons for summoning record / documents and selection for audit

Requirements of proviso to S.177(1) of Income Tax Ordinance, 2001, were met with and there was no reason for petitioners / taxpayers to be aggrieved of notices issued to them and to challenge the same

Constitutional petition was dismissed, in circumstances.

Commissioner is empowered under S.25(1) of Sales Tax Act, 1990, to call for record as and when required given that such is discretionary authority vested in Commissioner by statute

Commissioner is under obligation to record reasons for exercise of such discretionary authority in view of S.24A of General Clauses Act, 1897

Such exercise of authority must be just, fair and reasonable, on the basis of relevant considerations and not in pursuit of any extraneous considerations

Prior to exercising his discretionary authority under S.25(1) of Sales Tax Act, 1990, to summon record, Commissioner must state that there are reasonable grounds to conclude that self-assessed returns are not accurate reflection of registered person's tax liability and consequently there is need to audit record maintained by taxpayer in order to ascertain whether there is need to pass any reassessment order

Determination of existence of reasonable grounds to summon record for purposes of audit, is a prerequisite for exercise of such authority under S.25(1) of Sales Tax Act, 1990.

FBR is vested with no authority or jurisdiction under S.206 of Income Tax Ordinance, 2001, to control discretion vested in Commissioner under S.177(1) of Income Tax Ordinance, 2001.

If deemed assessment selected for audit and audit was conducted under S.177 of Income Tax Ordinance, 2001, such deemed assessment may be amended by invoking jurisdiction of S.122 (1) of Income Tax Ordinance, 2001, as envisaged under S.177 (6) of Income Tax Ordinance, 2001

Assessment can be amended after fulfilling pre-requisite requirement of 'definite information' under S.122 (5) of Income Tax Ordinance, 2001, subject to execution of conditions of S.122 (5)(i)(ii) & (iii) of Income Tax Ordinance, 2001.

Plaintiff / taxpayers' sought interim injunction to restrain Department from proceeding any further on notices for audit issued to the plaintiffs under S. 214C of the Income Tax Ordinance, 2001 and in accordance with the Department's Audit Policy of 2017

Contention of plaintiffs / taxpayers, inter alia, was that the Department had not revealed the parameters for selection and that S. 214C(1A) was ultra vires the Constitution

Validity

Under S. 214C(1A), it was not mandatory for the Department to disclose and notify parameters for selection of cases for audit purposes

Plaintiffs were seeking interim injunction, however they were unable to make out prima facie case for the same as the contention of plaintiffs was a mere challenge to Constitutionally of a law validity enacted by the Legislature

Balance of convenience also did not lie in favour of the plaintiffs and irreparable loss/injury would be caused to the Department instead of the plaintiffs, as at the present moment, it was only the conduct of audit with which the plaintiffs were aggrieved of

Any injunctive order in the nature of restraint and directing the defendant not to conduct audit, when the same is being done on the basis of a provision which for the time being is validly existing, would cause irreparable loss to the exchequer

Conduct of audit was not an adverse action or order, hence no irreparable loss would be caused to plaintiffs

No such relief could be granted at such stage of the proceedings whereby the law itself could be suspended by Court

Applications under O. XXXIX, Rr. 1 & 2, C.P.C. were dismissed, in circumstances.

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.

Appellate Tribunal Inland Revenue remanded matter to Commissioner (Appeals) for deciding the same keeping in view the grounds raised in memo of appeal

Authorities were aggrieved of clarification made by Appellate Tribunal Inland Revenue with regard to remand order passed earlier

Validity

Appellate Tribunal Inland Revenue, in its original order, did not consider grounds of appeal, which clearly entailed jurisdiction challenge made by taxpayer regarding selection of case for audit

Order in question only corrected scope of consideration for Commissioner (Appeals) in deciding appeal of taxpayer

Commissioner (Appeals) was directed to decide appeal including challenge made to jurisdictional issue regarding selection of case for audit in view of Ss. 177 & 214-C, of Income Tax Ordinance, 2001

Reference was disposed of accordingly.

High Court issued directions for ensuring consistency, transparency, fairness and certainty of procedures in selection of taxpayers for audit by the Federal Board of Revenue.

Role of audit officer was to dig out the instances of tax evasion and non-compliance to the statutory provisions causing tax evasion; his role finished on issuance of Audit Report, after seeking explanation, based on which further action was to be taken by an officer having quasi-judicial power of adjudication

Asking an Audit Officer to raise demand and making monthly collection through qualitative indicator was alien to the scope and concept of audit

Any plea bargain to drop audit proceedings, if certain percentage of extra tax was paid, was against the provisions, in the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, and the Federal Excise Act, 2005, dealing with audit

Selection for audit could not and should not be allowed to be used for raising revenue simpliciter, without conducting any audit and preparation of Audit Report.

To maintain separation between administrative and judicial powers, as envisaged in Art. 175(3) of the Constitution, it was necessary that quasi-judicial proceedings against a taxpayer were carried out by a taxation officer other than Audit Officer who conducted the audit because adjudication and audit were separate proceedings under the Income Tax Ordinance, 2001, the Sales Tax Act, 1990, and the Federal Excise Act, 2005

Procedural standards, under judicial or quasi-judicial proceedings, were different from standards of administrative proceedings

Audit was an inquiry/investigation of the tax affairs whereas adjudication needed to satisfy the requisites of fair trial as guaranteed to the taxpayer under Art.10A of the Constitution.

High Court deprecated such practice by observing that to keep an audit proceedings pending beyond the period given in Audit Policy meant; either FBR was not interested to conduct audit or lacked capacity to audit in the given period; that sword of being audited could not be allowed to hang over a taxpayer for an unspecified period, and that such exercise of power was indeed arbitrary and gave room to capriciousness, like dropping the selection for audit if payable tax was enhanced by the taxpayer

Constitutional petition was disposed of accordingly.

Plea that certain business sectors had a ninety to hundred percent chance of being selected for audit, therefore, the alleged random selection through computer ballot lacked transparency and fairness

Validity

Results of random selection alone were not enough to establish any malpractice

Even otherwise, Federal Board of Revenue had been given sufficient power to select 'person or classes of persons', hence selection of one business sector through computer ballot was not in excess of the mandate given to the Board

Constitutional petition was disposed of accordingly.

Income Tax Ordinance, 2001, had nowhere indicated that mere selection of a taxpayer for audit and calling of books of accounts to verify version declared in his return under Universal Self-assessment Scheme was the main theme of Income Tax Ordinance, 2001, would cause any injury/prejudice to taxpayer

Universal Assessment Scheme could not be imagined as free from verification and check

Return filed under such scheme could not be considered as a sacrosanct document not subject to any verification or check

No blanket immunity from verification and check through audit could be extended to taxpayers in a developing country like Pakistan, where tax fraud and evasion were rampant and order of the day

When the concerned authorities acted in accordance with law and the reasons were enumerated in the notices in question, no prejudice was caused to petitioners by mere selection of their cases for audit

Sufficient legal safeguards were available to petitioners against use of powers in an arbitrary manner

High Court declined to interfere in the matter as records of petitioners had already reached the tax authorities

Petition was dismissed in circumstances.

Competent authority to initiate audit of a person under S. 177 of the Income Tax Ordinance, 2001, was the Commissioner, and such audit not only related to the income tax returns filed by the person but also related to such person's "entire income tax affairs"

Determination criteria for selection for audit of a person was not restricted to returns filed by the said person but it may include the person's history of compliance or non-compliance with the Income Tax Ordinance, 2001; the amount of tax payable, the class of business conducted and any other matter, which in the opinion of the Commissioner, was material for the determination of the person's correct income

Conduct of the audit comprised of the income tax affairs, including examination of accounts and record, inquiry into expenditure, assets and liability of the person under audit

Scope of audit, thus, was not restricted to just returns filed by the person who was under audit

If the audit was based solely on particulars stated in the tax return filed, and the taxpayer filed revised tax return for the said tax year under S. 114 of the Income Tax Ordinance, 2001, and if the same clarified all the issues raised in the audit notice; then said audit would conclude, and the revised tax returns so filed would have to be accepted, and amended assessment order would be passed under S. 122 of the Income Tax Ordinance, 2001

If the revised tax return only clarified a part of the issues raised in the notice of audit, and not all, under such circumstances, when all issues raised in the notice for audit were not clarified, then the audit would proceed and appropriate amended assessment order was to be passed under S. 122 of the Income Tax Ordinance, 2001.

Notice issued to assessee after more than one year of filing of tax return requiring him to produce record/ documents pertaining to several assessments for conducting tax audit by Commissioner

Petitioner's plea was that power to select case for tax audit vested in Federal Board of Revenue by virtue of S. 214(c) of Income Tax Ordinance, 2001, thus, Commissioner had no power to issue such notice; that impugned Notice was time barred; and that by virtue of Circular dated 5-10-2009 issued by Federal Board, selection of case for tax audit for multiple tax years was illegal

Validity

After substitution of S. 177 of Income Tax Ordinance, 2001 by Finance Act, 2010, Commissioner ceased to have power to select case for tax audit, rather same vested in Board exercisable through random computer ballot or on parametric basis

Impugned notice could be issued within financial year in which return was filed, but not thereafter

Board through said Circular (dated 15-10-2009) had deprecated practice of selecting cases for past tax years

Such instructions of Board were binding on Commissioner

Principles

High Court accepted constitutional petition in circumstances.

Petitioner/taxpayer impugned notice for selection for audit issued under S. 214C of the Income Tax Ordinance, 2001 inter alia on the grounds that said selection was illegal as until "high risk" cases were identified through an open and transparent manner, no parametric balloting could be held and that in order to qualify as a "high risk case", all risk parameters must apply to a taxpayer, which was not the case of the petitioner

Validity

Statutory obligation of the Federal Board of Revenue (FBR) regarding selection of cases for audit under S. 214C of the Income Tax Ordinance, 2001, S. 72B of the Sales Tax, 1990 and S. 42B of the Federal Excise Act, 2005 was to conduct a ballot which may be 'random' or 'parametric'

Law clearly provided for selection of "persons" or "classes of persons" for audit and such selection of "persons" could conveniently be done through 'random balloting' while selection of 'classes of persons' could only be done through parametric balloting and it was axiomatic that in a parametric audit, the application of risk parameters to taxpayers would automatically segregate a group of taxpayers

Such parametric group of taxpayers was put through computer balloting (also parametric) and a limited number from amongst such taxpayers were selected for audit as per institutional capacity and requirement

Nature and character of the 'parametric group' would depend on the mode and manner of application of the risk parameters to the taxpayers and such architecture and design of risk analysis forming part of the audit strategy or policy, for a particular taxpayer, was the sole prerogative of the FBR

Courts may judicially review the audit policy announced by the FBR in order to satisfy itself regarding its fairness, openness and transparency besides ensuring that the audit policy has been fairly applied to the taxpayers across the board and the FBR had to show that the risk parameters have been duly framed by FBR and have been publically advertised for the sake of taxpayers' convenience along with the risk strategy adopted by the FBR

Perusal of risk parameters, applicable to the present case, showed that every parameter was independent and self-contained, and the contention that unless a basket of risk parameters was attracted to a case, the case did not qualify as a "high risk case", was erroneous

Number of facts determined risk, and therefore, even a single risk parameter could identify a "high risk case"

Expression "parameters are aimed at auditing high risk cases" used in the FBR Minutes, did not mean that application of all parameters would constitute high risk cases but meant that even a single risk parameter, from amongst the framed, could identify high risk cases

No illegality, therefore, existed in the selection of the petitioner for audit

Intra-court appeal was dismissed, in circumstances.

Petitioners, in the present cases, impugned notices for selection of their audit under S. 214C of the Income Tax Ordinance, 2001, S. 72B of the Sales Tax Act, 1990 and S. 42B of the Federal Excise Act, 2005

High Court on basis of consensus of the parties, set aside impugned notices and framed guidelines concerning parameters for selection of audit with the direction to the Federal Board of Revenue to initiate the process afresh in the light of the said guidelines and in full compliance with the mandate given under S. 214C of the Income Tax Ordinance, 2001, S. 72B of the Sales Tax Act, 1990 and S. 42B of the Federal Excise Act, 2005.