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Petitioner: AZEE SECURITIES (PVT.) LTD. through Authorized Officer VS Respondent: FEDERATION OF PAKISTAN through Secretary of Finance, Revenue Division and 3 others
Court Name: Sindh High Court Judge(s): Muhammad Junaid Ghaffar Title:AZEE SECURITIES (PVT.) LTD. through Authorized Officer vs FEDERATION OF
PAKISTAN through Secretary of Finance, Revenue Division and 3 others Case No.: Suit No,1277 and C.M.A. No,9428 of 2018 Date of Judgment:2018-10-11 Reported As: 2019 PTD 903 Result: Order accordingly Judgment ORDER MUHAMMAD JUNAID GHAFF AR, J.---Through listed application under Order XXXI Rules 1 and 2, C.P.C. and so also similar applications in connected Suits as mentioned in Appendix "A" to this order , the plaintif f(s) seek restraining orders against concerned Commissioner(s), Inland Revenue, from proceeding any further , on audit notice(s) issued to them respectively , pursuant to their selection for such audit under Section 214-C, of the Income Tax Ordinance, 2001, ("2001, Ordinance") by FBR. All these applications are being decided together as they involve a common question of law . 2. Precisely the facts as stated in the instant Suit are that Plaintif f is a Company holding Trading Rights Entitlement Certificate ("TREC Holder") and is duly licensed as Securities Broke r registered under the Securities Act, 2015 read with Securities Brokers (Licensing and Operations) Regulations, 2016 and accordingly is permitted to act as a broker on Pakistan Stock Exchange Limited. It is further stated that the Plaintif f has always been a compliant taxpayer and has never been charged with any default or non-compliance of the provisions of the 2001 Ordinance. It is the case of the Plaintif f that without notifying the criteria ' and parameters, the case of the Plaintif f has been selected for total audit for Tax Year 2016 through computerized balloting as per Audit Policy 2017 by FBR. In all these cases the notice issued pursuant to such selection for audit have been impugned and through listed applications, the Plaintif f(s) seek permanent injunction, whereas, ad-interim injunctions are operating in all these Suits. 3. Learned Counsel for the Plaintif f has contended that as per Audit Policy of 2017, 7.5% cases were to be selected for Audit out of the total Income Tax Returns filed for the year 2016 after excluding the cases already selected for audit under Section 177 of the 2001 Ordinance, whereas, FBR has exercised its powers under Section 214(C) of the 2001 Ordinance, without notifying the basis of high, risk para metrics fed into the computer balloting
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proceedings; that such conduct is against the law and so also is discriminatory in nature; that by not disclosing the list of cases for exclusion as above, a very higher percentage of cases have been selected as against the benchmark of 7.5% cases as mentioned in the Audit Policy; that past years Audit Policies were impugned by various taxpayers before the Lahore High Court, wherein, certain directions were given which have been flouted and violated while formulating the Audit Policy , 2017, and so also selection of the Plaintif fs for Audit purposes; that it was incumbent upon FBR to disclose the parameters of selection which has not been done and therefore, gross illegality has been committed; that under Section 214(C) of the 2001, Ordinance , it is provided that selection of audit can be made on the basis of parameters; however , this power should not be exercised and interpreted in a manner to include and or exclude any class or classes of persons; thence, exclus ion of taxpayers under salaries and final tax regime is unconstitutional and ultra vires to the 2001 Ordinance; that the purpose of audit is not meant for increasing revenue or penalizing taxpayers, whereas, the audit policy in question appears to be a policy which presumed that every taxpayer is a tax evader; that even otherwise, Section 214(C)(lA) of the 2001 Ordinance is ultra vires to the Constitution; that the audit policy of 2016 and 2017 are exactly ditto, whereas, the Audit Policy of 2016 was impugned before the Lahore High Court in the case of Treet Corporation v. Federation of Pakista n in Writ Petition No, 11253/2017 and vide judgment dated 21.3.2018 the selection of the Petitioner for audit in that case has been set aside which equally applies to the case of the present Plaintif fs. In support he has further relied upon Messrs Premier Industries Chemical Manufacturing Co. v. Commissioner Inland Revenue and 3 others (2013 PTD 398), Messrs Motorcycle Zone Shop, Sargodha v. Commissioner Inland Revenue (Appeals), RTO, Faisalabad and another (2013 PTD (Trib.) 1283, Defence Housing Authority v. Commissioner Inland Revenue and others (2015 PTD 2538 ), Nestle Pakistan Ltd and others v. Federal Board of Revenue and others (2017 PTD 686), Treet Corporation Limited v. Federation of Pakistan and others (W.P. No, 11253 of 2017), Pakistan Petroleum Limited v. Pakistan through Secretary Finance and 4 others (2016 PTD 2664 ), Messrs Pfizer Pakistan Ltd. though Company Secretary and others v. Deputy Commiss ioner and others (2016 PTD 1429 ), Linkdotnet Telecom Limited v. Chief Commissioner Inland Revenue, Islamabad and 2 others (2016 PTD 1436 ), Norinpaco and others v. Federation of Pakistan and others (2016 PTD 1214 ) and Yingquan Pang v. Collector of Customs and 2 others (2016 PTD (Trib.) 1222). 4. On the other hand, learned Counsel for Defendant / Department has contended that in tax matters every year is individual and audit policy for previous years cannot be aligned or equated with policies of subsequent years as all are based on different hypothesis, whereas, in the instant case the selection of the Plaintif fs has been done on random basis for which no parameters are required to be stated; hence the groun d taken is misconceived; that in the previous years the selections for audit were para met& and were challenged and though the Courts were pleased to struck down such selection by holding that risk area has not been properly laid down and adopted for Audit Policy 2016; however , the policy as a whole was held to be correct and was never struck down, whereas, Audit Policy of 2017 is different than the Policy of 2016 as in that year the balloting was conducted on random basis, therefore no risk parameters are to be notified; that even otherwise, and without prejudice to the above, in terms of Section 214(C)(1A) FBR is not bound to disclose its parameters, and shall keep such parameters confidential, therefore, no case is made out; that recently in the case reported as Commissioner of Inland Revenue, Sialkot and others v. Messrs Allah Din Steel and Rolling Mills and others (2018 SCMR 1328 ) the Hon'ble Supreme Court has put the controversy at naught by holding that even in random selection there is no procedural defect or error; he has also relied upon Mujahid Oil Refinery (Pvt.) Limited v. Director l&I Inland Revenue and others (2015 PTD 2572 ) and has also raised an objection as to, maintainability of this Suit pursuant to the directions of Hon'ble Supreme Court vide Judgment dated 27.06.2018 passed in Civil Appeal No,1171/2 017 as according to the learned Counsel a Suit is only competent upon payment of 50% of the disputed amount and that can only be filed against an action / order of the tax authorities whereas, selection for audit does not neces sarily means that an action has been taken or an adverse order has been passed. 5. I have heard both the learned Counsel and perused the record. As briefly discus sed hereinabove, the plaintif fs in all Suits are engaged in the business of stock brokerage and are registered with Pakistan Stock Exchange as members to engage in trading. In fact under the new arrangement they are now holding Trading Rights Entitlement
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Certificate Holders. They all claim to be compliant tax payers and as stated have never been charged with any default or non-compliance in respect of the provisions of the 2001 Ordinance. They all are aggrieved by selection of their case for audit in terms of Section 214C of the 2001 Ordinance by FBR, as according to them such selection has though been made on parametric basis; but the same has been done without disclosing the high risk parameters fed into the computer for selection of cases which is violation of the Constitutional rights of the Plaintif fs and so also against the decisions of the learned Lahore High Court as referred to hereinabove. In all these matters through application(s) under . Order XXXIX, Rules 1 and 2, C.P.C., Plaintif f(s) have sought restraining order(s) against the Defendants from taking any adverse action against them pursuant to such selection and impugned Notices issued thereafter , and this Court as an interim measure has restrained the defendants from taking any coercive action against them. As to objection raised by the office as well as by the learned Counsel for the department in respect of deposit of 50% of the disputed amount with the department as directed by the Hon'ble Supre me Court vide Judgment dated 27.06.2018 reported as Searle Solutions (Private) Limited v. Federation of Pakistan and others (2018 SCMR 1444 ), learned Counsel contended that the ratio of the said judgment is not applicable in the instant matter as there is no demand or assessment so far made by the department, therefore, the condition of 50% deposit does not arise. Apparently , such contention does appear to be correct and justified, however , it is also a matter of fact as well as concern, that immediately on issuance of a notice for audit this Court has been approached and a restraining order has been obtained. In these circumstances, the Department is yet to ascertain the amount, which might be payable by the Plaintif f. The Hon'ble Supreme Court in the aforesaid judgment, has not only issued directions for deposit of 50% of the calculated tax / demand; but has also directed that such jurisdiction, even otherwise, be sparingly exercised. Therefore, the Court has to see as to whether any case is made out for maintainability , even otherwise. Having said that, however , for the present purposes, I am not recording any conclusive finding and would defer this question to the time of settlement of Issues that as to whether in the given facts a Civil Suit is maintainable, wherein, no demand has yet been issued, notwithstanding the directions of the Hon'ble Supreme Court as above. 6. Coming, to the injunction application(s) in this matter , the first and foremost objection which has been raised and pleaded by the learned Counsel for the Plaintif f is to the effect that since the risk based parameters were not disclosed and notified before feeding the data into the computer for balloting; hence, the entire selection without disclosing such parametric is illegal and liable to be quashed. At the very outset it may be observed that though it has been pleaded that impugned selection is on the basis of parametric for which rules and reasons should have been notified in advance, but to support such contention nothing has been placed on record, whereas, department's case is that this selection is random and not parametric and is only from amongst a certain class(es) of person(s); therefore, no case is made out. Insofar as selection on random basis is concerned, the Apex Court in the case of Commissioner of Inland Revenue Sialkot (Supra) has put the controversy at naugh t which is discussed in detail hereinafter . Insofar as selection for audit under parametric is concerned, much stress was laid on the judgment of a learned Single Judge of the learned Lahore High Court passed in the case of Treet Corporation (supra) as according to the learned Counsel, in the said judgment, the selection of taxpayer under the Audit Policy 2016 without disclosure of the basis of parametric election has been set aside. It was further contended by the learned Counsel that Audit Policy of 2017 is identical to the Audit Policy of 2016; therefore, the said judgment is fully applicable to the present facts before this Court. The learned Lahore High Court in the above referred case has come to the following conclusions which are narrated in Paras 8, 9 and 10 of the judgment and for deciding the issue in hand it is necessary to refer to the same which reads as under:-- "8. Be that as it may, it seems that FBR has not, while selecting the case of the petitioner for audit, heeded to the concerns expressed by the superior Courts in the judgments referred to above and a number of other precedents over time. The focus and emphasis of the superior courts has been on leading transparency and fairness to the entire process and in case the selection is parametric in nature, to lay down a clear audit policy by which it can be gleaned that FBR has duly framed the risk parameters and has publicized them openly . In the instant case, although an audit policy has duly been framed and from the preamble of the policy , reproduced above, it seems
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that much emphasis has been laid on a paradigm shift in the mindset of FBR which focuses on realignment from random to parametric selection and from general to risk based approach, FBR has woefully been lacking in laying down a clear policy which would show the risk parameters on the basis of which selection for audit is being conducted. It was only upon the prompting of the petitioner that the petitioner was informed of the reasons for selection of the petitioner's case for audit and which too has been reproduced above. However , this is not a proper compliance of the judgments of the superior courts brought forth above. The requirement of those judgments will not be satisfied if a person was informed at a later stage of the reasons which weighed with FBR in selecting a particular person for audit. The essential requirement is for the risk parameters to be laid down and clearly defined along with the audit policy by FBR and those risk parameters should farm the basis for parametric selection and none else. Since admittedly no risk parameters have been provided by FBR, this would give unbridled and unstructured powers in the hands of the officers of FBR to select any registered person for audit. This seems to have been the case in the instant matter as well. The raison detre of parametric selection has been brought forth in the preamble of the Audit Policy , 2016 itself and the underlying purpose seems to be to minimize chances of selection of compliant taxpayers resulting in increased confidence for the system. The purpose in the estimation of FBR is to assist FBR in broadening the tax base and to focus on high risk areas. In the column relating to percentage of selection, the following is also pertinent:- "FBR shall conduct computer ballot on parametric basis for selection of 7.5% cases for audit out of the total Income Tax, Sales Tax and FED returns filed for Tax Year 2015 and Tax Period i,e, 1st July 2014 to June 2015 as determined by the Board-in-Council." 9. Thus, FBR has obligated itself to conduct computer ballot on parametric basis. To what avail, is the conducting of computer ballot if the parametric basis has not been framed and brought forth by FBR. Thus, the very basis of the computer ballot is knocked out and in fact there is nothing before FBR on which the computer ballot is being held. The mere framing of the Audit Policy , 2016 is insuf ficient until it is supported by clearly defined risk parameters on the basis of which the computer ballot ought to be held for selecting cases for audit. Be that as it may, the Audit Policy , 2016 is utterly lacking in this regard and not only that it contradicts its manda te as expressed in its preamble adumbrated but it also runs counter to the judgments of this Court which compel FBR to formulate risk parameters so as to form an essential part of any audit policy . Thus, the selection of the petitioner for audit does not comport with the judgments handed down by this Court. Plainly , FBR cannot proceed for the selection of audit and for taking a computer ballot until risk parameters have been laid down and adopted so as to form an integral part of the Audit Policy , 2016. 10. In view of the above, this petition is allowed . The notices issued to the petitioner with regard to the selection of audit for the period from 01.07.2014 to 30.06.2015 are hereby set-aside. As a consequence thereof the case of the petitioner for selection of audit is also set-aside. Although the challenge was also made to the Audit Policy , 2016 as a whole, I am not inclined to declare that Policy as unconstitutional. The Policy cannot be put into effect until FBR frames risk parameters on the basis of which the selection for audit is to be made." 7. Perusal of the aforesaid observations reflects that the learned Judge after making certain observations as to the conduct of FBR has observed that framing of Audit Policy of 2016, is not proper compliance of the judgments of the superior courts brought forth above, and further that the requirement of those judgments will not be satisfied if a person was informed at a later stage of the reasons which weighed with FBR in selecting a particular person for audit and that the essential -requirement for the risk parameters is to be laid down and clearly defined along with the Audit Policy by FBR and those risk parameters should form the basis for parametric selection and none else. However , it is of utmost importance to mention that while arriving at such conclusion reliance has been placed by the learned Judge on cases reported as Messrs Ittefaq Rice Urns v. Federation of Pakistan 2013 PTD 1274 , Premier Industrial Chemical Manufacturing Co. v. Commissioner Inland Revenue 2013 PTD 398 and Defence Housing Authority v. Commissioner Inland Revenue , 2015 PTD 2538 , whereas, in all these cases the audit policies of past years were under consideration. It is an admitted position that from 2016 onwards, the Audit Policy had a paradigm shift in compliance of various pronouncements of the Courts; therefore, in my humble view while considering the Audit Policy of 2017, (or for that matter of 2016 before the learned Lahore High Court), which is
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before this Court, reliance could not be placed on the pronouncements as above which had dealt with the Audit Policies of previous years, which were admittedly materially different in nature as well as substance. This is notwithstanding the fact that all these judgments referred to hereinabove as well as the Judgment in the Treet Corporation's case are authored by the learned Single Judges of the Lahore High Court, which are otherwise not binding in nature on this Court, but only persuasive. Again with utmost respect and humility at my command, and without any disrespect or inconsiderateness, I may observe that while passin g the Judgment in the Treet Corporation's case, reliance has been placed on judgm ents and orders as well as directions passed in respect of different Audit Policies of previous years which apparently appear to be at variance than the Audit Policy of 2016, and therefore, this Court is unable to convince itself to consider the Judgment in the case of Treet Corporation. (Supra) as a binding precedent. 8. There is another aspect of the matte r which has been left unanswered in the case of Treet Corporation (Supra), inasmuch as post 2013, the law has gone into a substantial change after insertion of Section 214(C)(1A). The Court while passing the judgment in Treet Corporation (Supra) has also not appreciated and considered that, even otherwise, the judgment in the case of Ittefaq Rice Mills (Supra) was dealing with the Audit Policy and Guidelines for the year 2011, and was delivered on 23.5.2013, when provision of Section 214(C)(1A) was not on the statute book and was only added through Finance Act, 2013 (XXII of 2013) assented on 29.6.2013. Accordingly it was never interpreted by the Court in that case. In such a situation, the finding of the learned Division Bench of the Lahore High Court, could not be of any assistance to the taxpayer's case, post 2013. It would be advantageous to refer to Section 214(C) as it stands today and reads as under-- "[1214C. Selection for audit by the Board.---( 1) The Board may select persons or classes of persons for audit of Income Tax af fairs through computer ballot which may be random or parametric as the Board may deem fit. [(1A) Notwithstanding anything contained in this Ordinance or any other law, for the time being in force, the Board shall keep the parameters confidential.] (2) Audit of Income Tax affairs of persons selected under subsection (1) shall be conducted as per procedure given in section 177 and all the provisions of the Ordinance, except the first proviso to subsection (1) of section 177, shall apply accordingly . (3) For the removal of doubt it is hereby declared that Board shall be deemed always to have had the power to select any persons or classes of persons for audit of Income Tax af fairs.] [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.]" 9. Section 214(C) provides that the Board may select persons or classes of persons for audit of Income Tax affairs through computer ballot which may be random or parametric as the Board may deem fit and subsection (1A) inserted through Finance Act, 2013, provides that notwithstanding anything contained in this Ordinance or any other law for the time being in force, the Board shall keep the parameters confiden tial. Perusal of the provisions of Section 214(C)(1A) reflects that it is not mandatory for the Board to disclose and notify the parameters for selection of cases for Audit purposes. In none of the judgments cited by the learned Couns el for the Plaintif f this aspect of the provision of 2001 Ordinance has been examined and interpreted. It is a matter of record that presently this Court is dealing with the injunction applications, and though the Plaintif f(s) have also impugned and challenged the vires of Section (1A) as above; however , till such time it remains on the statute book and is not declared as ultra vires, the Court must not interpret it in a manner which makes such provision as redundant or inoperative. It is to be borne in mind that if a certain provision is introduced in the Ordinance or Law, through Finance Act and has become part of the Law/Ordinance, it remains a valid part of the B Statute, unless otherwise, it is clearly demonstrated that it lacks Constitutional authority . It is a settled proposition of law that until and unless a Statute or a part of it, has been held or declared to be ultra-vires, the same remains operative for all intents and purposes. The present applications are to be decided keeping in view the three main ingre dients for passing an injunctive order i,e, prima-facie case, balance of convenience and irreparable loss. Insofar as the prima-facie case is
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concerned the plaintif fs have been unable to make out any such case as it is merely a challenge to the Constitutionality of a law validity enacted by the Parliament. It may be that the Plaintif fs may have a better reading of the law, but that would not make out a prima facie case for them to seek indulgence against a validly enacted law which remains in operation and is applicable as of today . The grounds urged on behalf of the Plaintif fs with regard to the unconstitutionality of the provision on the ground of discrimination are mere assertions, whereas, they have failed to substantiate it prima facie with any material or cogent reasons. Similarly , the balance of convenience also does not lie in favour of the plaintif fs and in fact insofar as irreparable loss/injury is concerned, the same would be caused to the defendants instead of the plaintif fs, as at the present moment it is only the conduct of audit with which the plaintif fs are aggrieved of. It is pertinent to observe that passing 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 is otherwise not an adverse action or order , hence no irreparable loss would be caused presently to the plaintif fs. It is also of utmost importance to note that what the plaintif fs are seeking through listed applications as an interim relief is in fact the final relief which they have sought through instant proceedings. Hence no such relief can be granted at this stage of the proceedings whereby the law itself could be suspended by this Court. The Hon'ble Supreme Court of Pakistan in the case of Federation of Pakistan v. Aitzaz Ahsan and…
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