Selection of case for audit

2023 PTD 649 KARACHI-HIGH-COURT-SINDH Judicial Precedent

Ss.25 & 177Selection of case for auditWord "reasons"ScopePetitioner taxpayer was aggrieved of letter and notices issued by authorities selecting its case for auditValidity

Word "reason" connotes an expression giving justification for an action, a ground to explain something, a consensus of informed thoughts whether factual or legal

Reasons should be so explicit so as to catch one's eye at the first glimpse and should not be a leap in a dark or a subject of fishing and roving expedition, but has to be based on sound principles of law

Before conducting audit, department is legally obliged to muster those grounds after proper application of mind and thereafter, while confronting taxpayer about selecting the case for audit, mindful as well as meaningful reasons have to be advanced, which have to be convincingly intimated to taxpayer to enable the latter to furnish a suitable reply and advance objections, if any, and those reasons should be based on independent application of mind and not on the basis of some unfounded notions, or capricious believes

Requirements of section 25 of Income Tax Ordinance, 2001, would not be fulfilled until and unless proper, just and identifiable reasons were intimated to taxpayer with regard to selection of its case for audit

Only when such reasons were given and thereafter if no compelling response was received, the case could be selected for audit

Other parameters as enshrined under S.25 of Income Tax Ordinance, 2001, would then come into play

Such requirement of law could not be termed to be simply procedural only

High Court vacated letter and subsequent notices in question as those were not in accordance with law and directed that authorities were fully authorized under the law that if they had certain requisite material for selecting case of petitioner for audit, the same should be communicated to petitioner and proceedings could be initiated afresh in accordance with law

Constitutional petition was allowed accordingly.

2023 PTD 576 KARACHI-HIGH-COURT-SINDH Judicial Precedent

Ss.25 & 72BSelection of case for auditFederal Board of Revenue and CommissionerJurisdictionsDistinction

Petitioners were taxpayers who were aggrieved of selection of their cases for audit by Commission on the directions of Federal Board of Revenue

Validity

Powers of Commissioner under S.25 of Sales Tax Act, 1990 and powers of Federal Board of Revenue under S.72B of Sales Tax Act, 1990, were independent

Former was based on subjective criteria and Commissioner was empowered to critically analyze returns of taxpayer

While the Commissioner was required to apply his mind to case of individual taxpayer and decide if there were reasons to select a taxpayer for audit

Federal Board of Revenue's powers under S.72B of Sales Tax Act, 1990, were objective in substance and were done under an objective policy for that year and then taxpayers were selected and/or a sector or sectors of taxpayers were selected through computer balloting on the basis of criterion

Where the Commissioner was to apply mind and provide reasons for selection, the later scheme of Federal Board of Revenue under S.72B of Sales Tax Act, 1990, enabled it to select a taxpayer through random and parametric balloting based on the development of a software which tookover the task of a Commissioner

It was an automatic selection and in some cases even notices calling for documents/record under S.25(1) of Sales Tax Act, 1990 under automatic audit selection

In the present case the entire exercise by Commissioner was carried out at the behest and on directions of Federal Board of Revenue and resulted in demand created against petitioners and Federal Board of Revenue itself was responsible for such foul play

High Court quashed notices issued by authorities

Constitutional petition was allowed accordingly.

2019 PTD 332 LAHORE-HIGH-COURT-LAHORE Judicial Precedent

Ss. 214-C & 214-DSales Tax Special Procedures Rules, 2007, Rr. 4, 5 & provisoNotification No. SRO 1125(I)/2011 dated 31.12.2011Notification No. SRO 608(I)/2014 dated 02.07.2014Selection of case for auditRetailer, status ofPetitioner was taxpayer and was aggrieved of notice issued by authorities selecting his case for audit

Plea raised by taxpayer was that he was retailer and was not liable for audit in terms of S. 214-C of Income Tax Ordinance, 2001

Validity

Retailers falling in any category mentioned in R.4 of Sales Tax Special Procedures Rules, 2007 were required to be registered under Sales Tax Act, 1990 in terms of Chapter-I of Sales Tax Special Procedures Rules, 2007

Taxpayer Registration Profile showed that petitioner was retailer registered with sales tax department therefore, he fulfilled requirement prescribed by R. 4 of Sales Tax Special Procedures Rules, 2007

Return filed by petitioner was also appended with record and it showed that it enjoyed benefit of Notification No. S.R.O. 1125(I)/2011 dated 31.12.2011

Authorities could not have selected case of petitioner for audit in terms of Ss.214-C & 214-D of Income Tax Ordinance, 2001

High Court set aside notice issued by the authorities

Constitutional petition was allowed in circumstances.

2019 PTD 2162 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

S. 177Selection of case for auditScopeAuditScope

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.

2018 PTD 2096 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 111, 120, 122(5) & 128(5) & 177Unexplained income or assetsAddition made on account of short term loan obtained from BankAmendment of assessmentSelection of case for audit

Appellate Tribunal vacated orders passed by the Authorities below and accepted appeal of the taxpayer on legal plane of jurisdiction

Sole factual ground, which needed adjudication was regarding addition made under S.111(1)(b) of the Income Tax Ordinance, 2001 on account of short term loan obtained by the taxpayer from the Bank, not in the relevant tax year

Amount could only be added in the person's income chargeable to tax in the year to which such amount related

Amount which was invested, obtained or owned by a person, would only be added in the year of investment and not in the subsequent or prior year

Amount in the present case, appeared to be under the head "current liabilities" (short term Bank borrowing) in the tax year 2008 and same also appeared in the tax year 2009; which clearly indicated that said amount was obtained by the taxpayer from Bank in the year 2008

Addition of said amount in the year 2009 was contrary to provisions of S.111(2) of the Income Tax Ordinance, 2001

Addition made in the wrong tax year 2009, was deleted

[Per Abdul Nasir Butt, Accountant Member disagreeing, [Minority View]: Taxpayer, had opted to assail the orders of the authorities below on the legal plane of selection of the case for audit, giving findings on other grounds of appeals and laying hands on the same, which were not stressed by the taxpayer, were unwarranted and legally unsustainable

Appellate Authority below had dismissed the appeal only on legal ground and no findings had been given by him in respect of merit of the case

Findings of the Appellate Authority below had further shown that during the appellate proceedings certain documents were produced before him, which had not been earlier produced before the adjudicating authority

Appellate Authority had no power to take evidence, details and documents which were not produced earlier

Taxpayer had not proved sufficient cause which prevented him to furnish the relevant documents, details before the adjudicating authority

Submission of fresh evidence/documents which were not produced earlier, had ousted the jurisdiction of the appellate Authority

Accountant Member observed that instead of upholding the order of appellate Authority, it was appropriate to remand the case to adjudicating Authority for de novo proceedings with directions to the taxpayer to furnish all the available relevant documents, details and evidence which he produced before the appellate Authority and were not entertained by appellate Authority due to embargo placed on him under S.128(5) of the Income Tax Ordinance, 2001

Adjudicating Authority, was also to be directed to give reasonable opportunity of being heard to the taxpayer to present his view point as well as the documents].

2018 PTD 2096 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss.177, 120 & 122(1)(5)AssessmentAmendment of assessmentSelection of case for audit

Taxpayer filed return of income for the year under consideration declaring loss, which was taken as an assessment order in terms of S. 120(1) of Income Tax Ordinance, 2001

Case was selected for audit under S.177 of the Income Tax Ordinance, 2001; on the basis of audit report, show-cause notice was issued to the taxpayer and proceedings culminated in passing of amended assessment

Appellate Authority dismissed appeal of taxpayer

Taxpayer had opted to assail orders passed by both the Authorities below on legal plane of selection of the case for audit

Taxpayer contended that selection of the case for audit under S.177 of the Income Tax Ordinance, 2001 was illegal as the case could be selected for audit by the Commissioner from 13-9-2001 till 27-10-2009; that till 27-10-2009 case in question was never selected by the Commissioner; however after that date the case could be selected for audit by the Federal Board of Revenue only and not by the Commissioner

Taxpayer, in circumstances, had sought vacation of the orders passed by both the Authorities below

Validity

Selection of case, for audit by the Commissioner, in the present case, was contrary to the settled law

Appeal of taxpayer was accepted by the Appellate Tribunal on legal plane of jurisdiction and there was no need to adjudicate upon rest of the grounds taken as per memo. of appeal

Order accordingly. [Per Abdul Nasir Butt, Accountant Member (Contra) (Minority View): Commissioner had the jurisdiction to issue notice in exercise of his power under S.177 of the Income Tax Ordinance, 2001, without selection of a person for audit by the Federal Board of Revenue under S. 214-C of the Income Tax Ordinance, 2001

Case, in the present matter, was lawfully selected for audit under S.177 of the Income Tax Ordinance, 2001 for the year 2009

Order passed by appellate Authority below was maintained and appeal of the taxpayer, stood dismissed].

2018 PTD 1054 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 177 & 214-CSelection of case for auditPowers of Commissioner Inland Revenue and Federal Board of RevenueScope

Case of taxpayer was selected for audit by Commissioner Inland Revenue, and for non-compliance of notices by the taxpayer, ex parte order was passed

Commissioner Inland Revenue (Appeals), annulled assessment on the ground that Commissioner Inland Revenue was not empowered to select cases for audit

Validity

Powers of Ss.177 & 214-C of the Income Tax Ordinance, 2001 with the Federal Board of Revenue and Commissioner Inland Revenue, to select cases for audit were not mutually exclusive, but were concurrent, and both could select cases for audit

Order passed by Commissioner Inland Revenue (Appeals) was cancelled and that of the department restored.

2017 PTD 1237 KARACHI-HIGH-COURT-SINDH Judicial Precedent

Ss. 11(2), 25 & 72-B [as inserted by Finance Act (XVI of 2010)]Income Tax Ordinance (XXXI of 1979), S.177Income Tax Ordinance (XLIX of 2001), 214-CSelection of case for auditCommissioner, jurisdiction ofTaxpayer was aggrieved of notice issued by authorities for selection of case of petitioner for auditValidity

Provisions of S. 25 read with 72-B of Sales Tax Act, 1990, were similar in nature to the provisions of S. 177 of Income Tax Ordinance, 1979, which authorized Commissioner to conduct audit of accounts of a taxpayer, independent of authority of Federal Board of Revenue to select cases for audit in terms of S. 214-C of Income Tax Ordinance, 2001

High Court declined to interfere in the matter

Constitutional petition was disposed of accordingly.

2017 PTD 1865 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 29, 120, 122, 131 & 177Selection of case for auditAmendment of assessmentBad debtCase of the taxpayer was selected for audit and after completion of audit proceedings, assessment was amended

Taxpayer being aggrieved with amendment order filed appeal before appellate authority, which vide impugned order was disposed of

Validity

Claim of taxpayer of written off of provision for bad debt and that of stores and spares were also disallowed to the taxpayer

Recovery proceedings having not been initiated, debts could not be held to be bad as irrecoverable

Taxpayer had also not fulfilled the condition of S.29 of the Income Tax Ordinance, 2001, for claiming written off bad debts

Action of Departmental Officer was confirmed by the Tribunal and appeal of the taxpayer in that respect was dismissed

Claim of obsolete stock and spares was allowed by the Tribunal

Claim for turnover/stock holding, having not been thrashed out properly through investigation to ascertain the allowability of the same for arriving at proper and justifiable conclusion, Tribunal remanded the case to Assessing Officer with direction to decide the same within sixty days from receipt of present order after giving proper and adequate opportunity of being heard and after considering all the details and aspects of the case and arguments of the taxpayer and pass judicial and speaking order after application of conscious mind.

2017 PTD 506 INLAND REVENUE APPELLATE TRIBUNAL OF PAKISTAN Judicial Precedent

Ss. 122(1)(5) & 177(4)Filing of income tax returnSelection of case for auditAmendment of assessmentCase of taxpayer was selected for audit under S.177(4) of Income Tax Ordinance, 2001

Assessing Officer, while passing ex parte order made additions in trading account regarding 25% of purchases and also disallowed 50% of claim of rest of profit and loss expenses

On filing appeal by the taxpayer and against order of Assessing Officer, appellate authority maintained disallowance of 25% of the trading account expenses; and deleted the 50% disallowance made by the Assessing Officer out of profit and loss expenses

Validity

Basic canon of accounting was that sales were made through purchases made, if the sales were verifiable, then how purchases could be termed as unverifiable

Admitted fact was that Assessing Officer, had not interfered with the sale

Assessing Officer principally having accepted the sales then terming the purchases as disallowance @ 25% was unjust and improper

Assessing Officer, appeared to be not cognizant with basic and generally accepted accounting principles

Section 122(5) of Income Tax Ordinance, 2001 was invoked by the Assessing Officer, which spoke about "definite information", but it was not ascertained as to what was the "definite information" that was available with the Assessing Officer

Provisions of S.122(5) of Income Tax Ordinance, 2001, allows amendment of any assessment only when the department was in possession of "definite information" and not otherwise

Assessing Officer, in that context, was under legal obligation to specifically identify the nature of assessed income and issue notice with specification as to under what terms and under which cl.(i)(ii)(iii) of subsection (5) of S.122 of the Income Tax Ordinance, 2001; to notice was issued by highlighting the fact under which category taxpayer's case fell

Non-issuance of such notice, clearly meant that while passing the amending assessment order, Assessing Officer was not in possession of "definite information"

Entire proceedings were void ab initio and illegal

Simple issuance of notice under S.122(9) of the Income Tax Ordinance, 2001, just after conducting audit of the taxpayer and prior to confrontation audit report/objection/charge-sheet for obtaining rebuttal/explanation by the taxpayer, was not enough to further proceed in the matter for amending the assessment under S.122 of the Income Tax Ordinance, 2001

Before making any additions and disallowances to the assessed income under the garb of audit under S.177 and amending the assessment, department was required to acquire legal jurisdiction under the provisions of S.122(5) of the Income Tax Ordinance, 2001

Requirements of S.122(5) of the Income Tax Ordinance, 2001, were to be strictly fulfilled in letter and spirit

Lump-sum disallowance in purchases and profit and loss expenses, was not tenable

Orders of the officers below were unlawful, not tenable being void ab initio

Tribunal disapproved the addition on percentage basis at 25% in the trading account expenses and directed that same be deleted.

2016 PTD 2664 KARACHI-HIGH-COURT-SINDH Judicial Precedent

S. 177Selection of case for auditObjections

Case of taxpayer was selected for audit but Commissioner did not pass any speaking order on the objections filed by taxpayer against the notice

Validity

Notice in question was a valid notice as contemplated under S. 177 of Income Tax Ordinance, 2001

Notice provided sufficient reasoning for selecting case of plaintiff for audit purposes

Law did not provide that upon taxpayer's objections to such notice, Commissioner was required to pass any justiciable speaking order in support of his reasoning nor any further judicial review of the same was mandated either within the hierarchy of Income Tax department or before a competent Court of law

Subsequent notices and proceedings pursuant to the first notice were also valid and justified

Taxpayer was at liberty to contest its case before departmental hierarchy in accordance with law

Suit was dismissed in circumstances.

2016 PTD 12 FEDERAL-TAX-OMBUDSMAN-PAKISTAN Judicial Precedent

Ss. 177(10), 121(1)(d), 137 & 214-CEstablishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), Ss.2(3) & 10(4)Selection of case for auditMaladministration

Complainant contended that he started business with effect from 18-12-2012; that return was due from tax year 2013, and not for tax year 2012; that his case could not be selected for audit under S.214-C of Income Tax Ordinance, 2001; that department issued illegal demand under S.137 of Income Tax Ordinance, 2001, and assessment order of another party was attached with the said demand notice and that rectification application was not responded, which tantamounted to maladministration under S.2(3) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000

Validity

Filing of return on e-portal of the FBR, was not established from the record being maintained by the department

Department failed to provide proof regarding service of order on the complainant passed in his name

Contention of the complainant that the assessment order of another taxpayer was appended with the demand notice issued in his name, had been found correct and the same was verified from the documents provided by him

Since the department failed to establish the filing of return by the complainant, question of its selection under S.214-C of the Income Tax Ordinance, 2001, would not arise

Order passed under Ss.177(10)/121(1)(d) of the Income Tax Ordinance, 2001, was not tenable in law, as mistake in passing/service of order upon the complainant was not rectified

Act of the department in dispatching the demand notice with incorrect assessment order in a hasty manner, had shown inefficiency and incompetence, which tantamounted to maladministration under S.2(3) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000

Federal Board of Revenue, was recommended to direct the Chief Commissioner to revisit the order passed under Ss.177(10)/121(1)(d) of Income Tax Ordinance, 2001, and finalize the same by ascertaining true facts after providing opportunity of being heard to the complainant, as per law within four weeks, report compliance within 7 days thereafter.