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Petitioner: MOHSIN RAZA VS Respondent: CHAIRMAN, FEDERAL BOARD OF REVENUE and others
Court Name: Lahore High Court Judge(s): Irfan Qadir Title: MOHSIN RAZA vs CHAIRMAN, FEDERAL BOARD OF REVENUE and others Case No.:Writ Petitions Nos. 4630, 4398, 4631, 4673, 4810, 4811, 5073, 5192,5216, 5537,
JUDGMENT
Reported As: 2009 PTD 1507 Result: Petitions allowed Judgment JUDGMENT {{TABLE}} ' IRFAN QADIR, J.---These are Writ Petitions Nos. 4398/09, 4630/09, 4631/09, 4673/09, 4810/09, 4811/09, 5073/09, 5192/09, 5216/09, 5537/09, 5583/09, 5752/09, 5825/09, 5946/09, 5947/09, {{TABLE}} 5997/09, 6004/09, 6030/09, 6037/09, 6038/09, 6127/09, 6128/09, 6129/09, 6143/09, 6157/09, 6175/09, 6240/09, 6241/09, 6290/09, 6333/09, 6334/09, 6383/09, 6384/09, 6385/09, 6386/09, 6387/09, 6388/09, 6389/09, 6390/09, 6520/09, 6521/09, 6666/09, 6667/09, 6694/09, 6769/09, 6771/09, 6779/09, 6780/09, 6781/09, 6816/09, 6931/09, 6948/09, 6953/09, 7093/09, 7101/09, 7241/09, 7398/09, 7423/09, 7424/09, 7425/09, 7443/09, 7499/09, 7505/09, 7550/09, 7551/09, 7664/09, 3667/08, 4022/08, 4200/08 and 4673/08. ' All these writ petitions call in question the orders of Commissioner Income Tax whereby income tax affairs of all these petitioners were selected for audit under section 177(4)(d) of the Income Tax
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Ordinance, 2001. As common questions of law arise in these cases, these are being disposed of by this single judgment. 2. The facts which are essentially germane to all these cases are that the petitioners are tax payers within the meaning of section 2(66) of the Income Tax Ordinance 2001 and are duly registered with the respondents having a distinct national tax number. They furnished income tax returns under section 114 of the Ordinance for the tax year 2008 and their returns were treated to be an assessm ent order issued by the Commissioner of Income Tax in terms of section 120 of the Income Tax Ordinance, 2001 on the date on which each return was submitted. Subsequently letters were issued to all the petitioners whereby the Commissioner of Income Tax (Audit) selected the cases .Of the petitioners for audit with specific reference to subsection (4) of section 177 of the Ordinance. Aggrieved by the initiation of audit proceedings all these petitioners filed the instant writ petitions wherein the legality of orders of selection of their cases for audit under section 177(4) has been assailed on a number of grounds. Most of the learned counsel appearing for the writ petitioners have addressed separate arguments in support of these petitions. These arguments are accordingly being taken up in the sequence in which the learned counsel appeared.. Dr. Ilyas Zafar, Advocate Supreme Court appearing in Writ Petition No. 7107 of 2009 stated that in the current year the petitioner declared more income than the previous year i.e. Rs.150 million as against the previous years income of Rs.139 million. Correspondingly the total turns over also increased from 1647 million of the preceding year to 2165 million of this year. A deemed assessment order was accordingly passed but the notice envisaged under section 114(2) of the Income Tax Ordinance for any deficiency for the return was not issued. Likewise without complying with the requirement of section 120(3) no notice qua an incorrect entry in the return was served as per law. Dr. Ilyas Zafar, Advocate maintained that since the return of the petitioner was not treated as invalid under section 120(4) of the Income Tax Ordinance, the selection of petitioner's case for audit was in itself against the spirit of the Income Tax Ordinance. Dr. Ilyas Zafar Advocate argued that section 177 of the Income Tax Ordinance is violativeof Articles 2-A and 25 of the Constitution for which he has placed reliance on the following judgments of the Supreme Court of Pakistan:- ' 1998 SCM R 2268. ' 1997 SCM R 1804 (relevant page 1810). 5. Learned counsel while laying emphasis on Article 4 of the Constitution argued that section 177 of the Income Tax Ordinance in itself runs counter to the concept of due process of law since the said provision in no way provides guidelines for structuring of discretionary powers in an open and transparent manner. Any provision which confers unbridled discretion is to be considered inconsistent with Article 4 of the Constitution. Reliance in this regard is placed on:-- ' 2005 PTD 152 ' 2009 SCM R 344 = 2009 PTD 37 6. Additionally; it is argued that (i) there is an apparent conflict between sections 177 and 120 of the Income Tax Ordinance in as much as an order of deemed assessment under section 120 can be changed at the whims of the respondent under section 177. In other words with the invocation of section 177 the deemed assessm ent ceases to be a deemed assessment and thus the sanctity of an assessm ent in the year in which it is passed by the authorities is completely eroded. Besides, the operations of a corporate entity are adversely affected especially in the case of the present petitioners who remain constantly disturbed by the frequent visits to their factory premises of the officials of the taxation authorities seeking undue explanations notwithstanding the fact that all the relevant account books and the entire record pertaining to Income Tax affairs had been handed over to the taxation authorities. 7. Mr. Tahir Mehmood Butt, Advocate appearing as counsel in Writ Petition No. 4811 of 2009 relying on Muhammad Hussain's case stated that while selecting the case for audit under the old section
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177, the Lahore High Court held the same to be null and void as a result of which section 177 was amended by the legislature. The background in which section 177 was amended is to be gathered from the judgment rendered by this court in Muhammad Hussain's case. The whole idea of the amendment was to take away the powers of the Commissioner and vest the same in the Federal Board of Revenue. Mr. Tahir Mehmood Butt, laid emphasis on the background in which the powers earlier granted to Commissioner vide section 177(I) had been taken away to contend that in this peculiar backdrop the real essence of the amended section 177 of the Income Tax Ordinance is to be gathered. Neither the Commissioner has issued any criteria whatsoever for the selection of cases for audit nor has the same been issued by the Federal Board of Revenue. According to him confidentiality of the criteria envisaged in subsection (3) of section 177 can by no stretch of imagination be interpreted to mean the absence of criteria or that such criterion is in any way to be kept confidential even from the tax payer. Learned counsel contends that sub-clause (4) of section 177 cannot be invoked in the absence of any criteria laid down by the Federal Board of Revenue. This section provides a complete procedure for carrying out audits and the same has to be followed in letter and spirit keeping in view the sequence in which things are to be accomplished in terms of the four subsections of section 177. Even if the sequence is to be followed clause (4) of section 177 is still to be applied sparingly and in exceptional circumstances because it is to be resorted to in addition to the criteria laid down in sub-clauses (1) and (2) and not in substitution thereof. In other words sub-clause (4) will only come into play if criteria laid down in the preceding sub-clause are practically rendered ineffective owing to certain peculiar or exceptional circumstances. The impugned audit clearly suggest that present section 177 of the Income Tax Ordinance is being applied in the manner in which the un-amended section 177 was being applied by the department itself. In other words section 177 as it now stands makes it crystal clear that what was being done through various circulars in the light of section 59 of the previous Income Tax Ordinance is still being done presently. If the intention of legislature had been to bypass sub-clauses (1), (2) and (3) then instead of using the words "in addition to" in subsection (4) the word "notwithstanding" could have been used. The reasons mentioned in the impugned selection of case for audit at Ahnexure "B" of the writ petition are extraneous to the grounds mentioned in sub-clauses (a) to (d) of subsection (4) of section 177 of Income Tax Ordinance 2001. It has been held in the case of Muhammad Hussain that reasons for selection of case should be subsequently mentioned with reference to the relevant sub-clause of subsection (4) of section 177. It is next argued that the powers exercised by the Commissioner in the cases of - the petitioners have not been exercised reasonably, justly and fairly in as much as the petitioners cases have been selected for audit on the ground that expenses appeared to be inflated. This ground is not a valid ground under section 177 of the Income Tax Ordinance. Reliance.Is placed on:- ' PLD 2002 SC 630 (relevant page is 640 para F). ' 2007 SCM R 1367 = 2007 PTD 1656. 2007 PTD 1800. 8. Mr. Siraj-ud-Din Khalid, Advocate in Writ Petition No.6816 of 2009 states that the words 'in addition ta' appearing in subsection (4) as per its legal meaning would not mean 'in lieu of'. Under section 177, the selection is to be of the income tax affairs of a person and not of income tax return. Reliance is placed on 2009 PTD 284. He contends that once audit takes place of income tax affairs then there is no need or requirement to carry out an audit again. The petitioner contends that in his case i.e. W.P. No. 6127 of 2009 the income tax affairs have already been audited and regarding the same affairs now a fresh notice qua its selection has been issued. According to the learned counsel once an audit has been concluded the same cannot be re-audited because there is no provision in Income Tax Ordinance for re-audit. Relying on 2008 PTD 1440 it is contended that selection cannot be made after the end of the financial year in which the income tax return was filed since section 177(7) prohibits more than one audit in a year. Year means `year' as defined in
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General Clauses Act since there is no definition of word year in the Income Tax Ordinance). Relying on 2005 PTD 152 read with Supreme Court case reported as 2009 PTD 37 the learned counsel contends that before selection of a case for audit the opportunity of being heard is mandatory. He further states that subsection (4) is unreasonable and vague and hence unconstitutional. Reliance is placed on 2006 PSC 9. 9. Mian Ashiq Hussain, Advocate in W.Ps. Nos. 5073, 6241, 6240 of 2009 contends that no case can be selected without objective criteria because subjective selection is always arbitrary and the same is inconsistent with the rule of law. Reliance is placed on:- ' 1991 PTD 968. ' PLD 1997 SC 582 (relevant portion at page 670 ). ' 1976 34 Tax 31 (Lahore) 1978 67 ITR 11 (SC India) 10. He states that according to section 120(3) of the Income Tax Ordinance the deficiency in docunients is to be covered up in terms of said section and the same cannot be bypassed by seeking refuge in section 177. In order to circumvent the limitation provided in section 120(6) the respondents have resorted to section 177 which is against the basic spirit of the enactment. In fact a general provision is being made to supersede a special provision, which cannot be done. 11. Mr. Shahbaz Butt, Advocate has dilated upon the change in the tax policy in the preceding years when the country has switched over from the culture of suspicion to tax payer friendly approach. In support of these arguments it is stated that in the Income Tax Ordinance, 1979 there was only one taxpayer friendly provision and that was section 59 thereof. According to him section 177 of the Income Tax Ordinance is to be viewed in the light of these changing trends and keeping in view the ethos of the present Income Tax Ordinance. He says that there is an obligation on the Commissioner to exercise the discretion vesting in him in terms of clause (d) of subsection (4) of section 177 of Income Tax Ordinance judiciously and reasonably while selecting a case for audit. Such exercise of discretion is lacking in the instant case. The learned counsel submits that about 359 cases were selected in just one day i.e. On 20-1-2009 by brushing aside all the sub-sections and clauses of section 177 of the Income Tax Ordinance against all norms of reasonableness and due process of law. 12. Mr. Muhammad Ilyas Khan, Senior Advocate Supreme Court of Pakistan counsel for respondent/department has raised a preliminary objection that these petitions are premature and are thus not maintainable. It is stated that no adverse order has so far been passed and the eventual outcome of the audit can also be in favour of the petitioners. The petitioners have approached this court merely on anticipation as if the matter is going to be decided against them. The petitioners could have filed these writ petitions in case any adverse action had been taken for which complete procedure is available, in which case prior notices are to be issued under section 120 of the Income Tax Ordinance in which proper opportunity is then to be afforded to the petitioners whereafter amended assessment can be made under section 122 of the Income Tax Ordinance. Reliance in this regard is placed on 1995 Taxation 211 LHC (relevant para 17), 2000 SCM R 1017. 13. It is contended that different clauses of section 177 are independent of each other especially because of the word "also" appearing after the words "in addition to" in clause (4) of the said section. It is further contended that the words Income Tax .Affairs in clause (4) include any affair of Income Tax irrespective of constraints of time. Likewise it is contended that clause (d) of subsection (4) is also independent of the preceding clauses namely (a), (b) and (c). The very spirit behind the tax friendly provisions of the Income Tax Ordinance is to facilitate the taxpayers to be truthful in filing their returns and conducting their income tax affairs qua which a solemn declaration is also filed as a part of the Income Tax return and in this background the department is well within its right to ensure as to whether the taxpayers are adhering to the declaration furnished by them or
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not and section 177 is therefore a means of discovering as to whether the declarations have been filed in a bona fide manner or not and if the tax payer proves that the return has been filed as per the declaration then the audit would be dropped. If the declaration is incorrect then any fraudulent declaration would vitiate the assessment. It is further contended that the word income tax affairs for the first time has been used in the Income Tax Ordinance 2001 prior to which this term was never used in earlier laws on the subject and the word Income Tax affairs is wide enough to include the expenditure, profits, over all turn over, sales, costs and liabilities or anything having nexus with income tax affairs. The selection of income tax affairs can be done in a two fold manner firstly on the guidelines of the Board and secondly by the Commissioner himself subject to his own opinion or subject to the opinion formed by Commissioner in terms of subsection (4). It has been so held in I.C.A. No. 125 in Writ Petition No. 1272 of 2000 and 94 Taxation 317 SC (relevant Para 3). In Fatima Sharif case Supreme Court of Pakistan expunged last three lines of paragraph 7 and paragraph 8 in totality of Muhammad Hussain's case. The manner and the procedure in which notice under section 177 is now to be given has been settled in Fatima Sharif's case and impugned notices in all these cases are in consonance with the criteria mentioned in the said case. 14. It has further been emphasized by Mr. Muhammad Ilyas Khan, that matters pertaining to business loss, allocation of expenses, decline in sales etc. Are not to be gone into in constitutional jurisdiction since the same is tantamount to gag the process and proceedings contemplated under the Income Tax Ordinance. (Reliance is placed on the same judgment of Division Bench). According to Mr. Muhammad Ilyas Khan, all these judgments including ICA judgment referred to above clearly suggest that the Commissioner of Income Tax independently of other subsections and clauses of section 177 can select matters which are required to be audited. It has also been contended that clause (4) being independent of the preceding clauses or subsections, empower the Commissioner even in the absence of criteria to select cases for audit (reliance is placed on the same judgment of ICA). It is further asserted that the deficiencies in Income Tax return are to be removed or rectified under section 120(6) whereas the income tax affairs are to be audited under a separate section which is 177 and section 177 to that extent is independent of income tax return. Even if those deficiencies have been completed, even then selection of audit is totally independent and these provisions are completely separate and provide for separate situations. 15. Learned Deputy Attorney General while adopting the arguments of Mr. Muhammad Ilyas Khan, Advocate, additionally contends in response to the arguments, advanced by learned counsel for the petitioners that the non-.Obstante clause of section 120 confers overriding powers upon the Commissioner of Income Tax to carry out the audit of Income Tax affairs notwithstanding the provision of subsection (1) of section 120. The learned Deputy Attorney General has further argued that the petitioners have not approached the court with clean hands otherwise they would never have filed the instant writ petitions since the only apprehension which the petitioners have is with regard to their incorrect declarations which they want to hide and writ is not to be issued in favour of someone who attempts to camouflage some wrong doing.. 16. Mr. Shahid Jamil Khan, Advocate has essentially adopted the arguments of Mr. Muhammad Ilyas Khan, Advocate. He however contends that no criteria has been laid down by the Federal Board of Revenue and clause (d) of subsection (4) of section 177 of Income Tax Ordinance, 2001 has no nexus with the said criteria. According to him clause (d) deals with altogether a different situation and the impact of the same is to be viewed in a different context. He has also argued that any criteria contained in section 177 is to be laid down in exceptional circumstances whereas powers of Commissioner under clause 4(d) are to be exercised in routine or generally without any reference to the said criteria. He further said that in the presence of criteria there is no question of any discretion being exercised by the Commissioner except that there is a clear distinction between subsections (3) and (4) of section 177. He argued that Commissioner is to form an opinion
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in terms of clause (d) of subsection (4) and the formation of opinion is the sole discretion of Commissioner. Learned counsel has emphasized that clause (d) of subsection (4) is totally independent from all the preceding clauses and subsections of section 177. Lastly the learned counsel in support of his submissions has relied on Fatima Sharif s case supra. 17. In rebuttal Mr. Ali Imran Rizvi and Mr. Shahbaz Butt, Advocates maintain that the case law relied upon by Mr. Muhammad Ilyas Khan, learned counsel for respondent department, as well as learned Deputy Attorney General is not applicable to the facts and circumstances of the present cases since the said case law pertain to selection of audit under section 177 for the tax year 2003. At that time, according to them section 177 of the Income Tax Ordinance was materially different and after the substitution of the new section 177 by the Finance Act, 2004 the said section of the Income Tax Ordinance has undergone a considerable. Change and the ingredients of the amended section 177 are altogether different from the previous section. 18. After hearing the learned counsel for the parties, this court at the very outset propose to deal with a preliminary objection that has been raised by Mr. Muhammad Ilyas Khan, Advocate that selection of a case for audit, in itself, has not given any cause of action to the writ petitioners in view of the fact, that, no adverse order has hitherto been passed against the petitioners and at this stage in the absence of any final order passed, the eventual outcome of the audit can also be favourable to the petitioners. According to Mr. Muhammad Ilyas Khan, the petitioners are only anticipating a grievance, which may or may not mature. The learned counsel contends that this Court will not exercise writ jurisdiction on an anticipatory cause of action or on a mere apprehension that eventual outcome may not be very favourable qua the interests of a prospectively aggrieved person. Mr. Muhammad Ilyas Khan maintains that as and when an adverse order will be passed in pursuance of the audit being conducted by department in terms of section 177 of the Income Tax Ordinance, 1991, there are ample remedies provided to the aggrieved. 19. Dr. Ilyas Zafar in his arguments with regard to Writ Petition No.7101 of 2009 has furnished an answer to this preliminary objection by stating that notwithstanding the fact that all the relevant accounts and the entire record have been handed over to the Taxation Authorities yet their frequent visits to the factory premises seeking impertinent explanations is adversely affecting focus of the management from achieving their commercial targets. 20. At this juncture this court may observe that it is well settled proposition of law that roving inquiries and fishing expeditions and that too in violation of the statutory provisions not only cause the subject of such inquiry to become an aggrieved person but such a course of action is also violative of due process of law thereby entitling the aggrieved not only to claim damages in a Court of civil jurisdiction but the same also entitles him to agitate his grievance through invocation of writ jurisdiction. The answer to question whether the impugned selection of cases for audit is within the four-corners of law or not, will determine the issue of maintainability of the writ petitions. All the aforesaid writ petitions call in question the impugned letters whereby their income tax affairs have been selected for audit on the ground that these impugned letters are violative of statutory provision viz. Section 177 of Income Tax Ordinance, 2001. The question involved in these writ petitions is purely a legal question falling within the ambit of Article 199 of the Constitution and as such the preliminary objection raised by Mr. Muhammad Ilyas Khan, as to the maintainability of these writ petitions is not very convincing. Reliance in this regard is placed on a judgment rendered by the Supreme Court of Pakistan in the case of "Assistant Collector of Customs v. Khyber Electric Lamps etc" reported as 2001 SCM R 838 wherein it was held by the august Supreme Court that writ petition was maintainable where a notice issued to the petitioner did not contain specific particulars relating to the provisions of law under which the same was issued. 21. In order to determine the legality of impugned selection of income tax affairs of the petitioners by the Commissioner under section 177 of the Income Tax Ordinance, 2001 a thorough analysis of
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the said provision is required. This section reads as under:--- "177. Audit.---(1) The Central Board of Revenue, may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner. (2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the Central Board of Revenue under subsection (1). (3) The Central Board of Revenue shall keep the criteria confidential. (4) In addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit ,of the person's income tax affairs having regard to:--- (a) the person's history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter which in the opinion of Commissioner is material for determination of correct income. (5) After selection of a person for audit under subsection (2) or (4), the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities) of that person. (6) After completion of the audit under subsection (5) or subsection (8), the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessm ent under subsection (1) or subsection (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for…
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