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Petitioner: Kohinoor Sugar Mills. VS Respondent: Federation of Pakistan etc
Court Name: Lahore High Court Judge(s): Ijaz-ul-Ahsan Title: Kohinoor Sugar Mills. vs Federation of Pakistan etc Case No.: W.P. No, 4691 of 2010 Date of Judgment:2015-05-27 Reported As: 2018 PTD 821, PTCL 2018 CL. 98 Result: Petitions dismissed
Judgment JUDGEMENT: MR. JUSTICE IJAZ UL AHSAN.--(1). Through this common judgment, I intend to decide this and other constitutional petitions mentioned in Annexure "A" to this judgment. All these petitions raise common questions of law and facts. 2. The petitioners have challenged the validity of notices issued by the Commissioner Inland Revenue for audit of their income tax affairs under Section 177 of the Income Tax Ordinance, 2001 ("ITO") for tax year 2009. Their case, as put forth by their learned counsels, is that proceedings to conduct audit of their income tax affairs have been commenced by the Revenue Authority without allowing them an opportunity of being heard. Resultantly, they have been deprived of their right to file their defence against the intended proceedings which is violative of the principles of natural justice. It has further been contended that the Commissioner Inland Revenue was under a legal obligation to disclose to the taxpayer the basis of selection for audit, confront him with such basis, invite objections from him and finally to pass a speaking order to justify such action. The main argument is that the Commissioner has not followed the aforenoted requirements of law. Consequently, the notices, the selection of cases for audit and the related proceedings are malafide and utterly illegal. It is further argued that the selection of cases of the petitioners for audit is unlawful, illegal and without jurisdiction insofar as provisions of Section 177 of ITO relating to selection of cases for audit have been substituted through Finance Act, 2010 and a new Section 214-C has been inserted in the ITO. It is submitted that perusal of the substituted section 177 and newly inserted Section 214-C shows that the Commissioner Inland Revenue is no longer vested with the authority to select a person to conduct audit of Income Tax affairs of such person. His power is limited to conducting audit after selection has been made by the Federal Board of Revenue in
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terms of Section 214-C. 3. The learned counsel for the petitioners have argued that after the aforenoted amendments brought about by way of Finance Act, 2010, power of the Commissioner to select a person for audit has been taken away and the same has been vested exclusively in the Federal Board of Revenue ("FBR"). Therefore, having no power to select under Section 177, the notices issued by the Commissioner calling for record for the purpose of audit are without lawful authority, illegal, and void ab-intio. 4. The learned counsel for the petitioners have further argued that Section 214-C has been inserted while Section 177 has been substituted through Finance Act, 2010. Both new sections are prospective and cannot be applied retrospectively. It is maintained that the tax year 2009 had already come to close on 30.06.2009 and die income tax returns for the said tax year stood filed and had attained the status of assessment orders on the date of filing, by operation of law in terms of Section 120 of the ITO. Consequently, a vested right had accrued in favour of the assessee which could not be taken away. The amendment in the law cannot be applied retrospectively unless the legislature has specifically given it retrospective effect. It is maintained that the notices addressed to the petitioners constitute a fishing expedition to look for evidence from the records and books of the petitioners. Such expeditions are not warranted by law. It is pointed out that respondent No, 2 in any event was under a legal obligation firstly to disclose the basis of selection to the concerned person, secondly to confront him with such basis and finally after inviting objections from the concerned person, pass a speaking order so as to justify such selection. The Commissioner has not followed the aforenoted procedure in consequence of which, notices and proceedings emanating from such notices have lost their legal sanctity. 5. The learned counsel for the respondents, on the other hand have argued that reasons were recorded by the Commissioners and the conditions of Section 177 were fulfilled in issuing such notices to the petitioners. They submit that even if in some instances reasons have not been communicated, no prejudice has been caused to the Petitioners. The have merely been summoned by the Commissioner. Once they appear before him and prior to commencement of audit proceedings (if necessary), they would be confronted with the reasons for issuance of the notice and given full opportunity to meet such reasons and defend their position. As such no prejudice has been caused to the Petitioners. It is pointed out that after examining the record and confronting the taxpayers with the discrepancies, if any, in case the Commissioner is dis-satisfied with the response, he may proceed to conduct audit of the income tax affairs of the assessee in accordance with law. 6. The learned counsel for the Respondents emphasize that the said audit is qualitatively different insofar as it is record based and on every step reasons are required to be recorded and such reasons are required to be disclosed to the assessee, who on being confronted has an opportunity to respond to the same and defend his position. 7. The learned counsels submit that selection of an assessee for audit by the Federal Board Revenue under Section 214-C is a totally different and independent power which is not record based. It is in the form of computerized balloting which may either be random or parametric. Ones the Board undertakes such selection in exercise of its powers under Section 214-C and no reasons for such selection need be disclosed because there are none (except that the computer has picked up a name like a lottery), it may direct a Commissioner to conduct an audit in accordance with the procedure prescribed under Section 177 or appoint a firm of Cost and Management Accounts to conduct an audit on his behalf. It is, however, clarified that there cannot be overlapping audit in that a person cannot be subjected to two audits, one on the basis of power exercised by the Commissioner under Section 177 and the other on the basis of selection by the Board under Section 214C of the ITO.
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8. It is further submitted that in 2013, the position was further clarified and explained by the legislature by declaring that powers of Commissioner under Section 177 were independent of the powers of the Board under Section 214-C and that the provisions of Section 214-C did not restrict the independent power 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. They submit that simultaneously, a corresponding amendment was inserted in Section 177 to re-affirm the independent powers of the Commissioner to call for record under Section 177 and conduct audit under the said provisions. They further maintain that the amendments inserted in Section 177 and 214-C in 2013 clarified and explained the meaning, scope and intent of the legislature with regard to Section 177 and 214-C of the ITO. 9. Notwithstanding the above, it is submitted that even in the year-2009, the Commissioner enjoyed an independent power to call for the record of a person or classes of persons and upon being satisfied that there were valid reasons to probe the matter, conduct audit having regard to the criteria given in Section 177(4)(a) to (e). They maintain that notices sent to the petitioners meet the criteria of the original as-well as the amended section 177 ITO and therefore, cannot be struck down on the basis of technical objections. 10. The learned counsels for the respondents have vehemently argued that the audit provisions contained in Section 177 and 214-C are admittedly machinery provisions. It is settled law that such provisions are required to be construed liberally in order to facilitate the respondent department to perform its regulatory functions. It is pointed out that the exercise of powers by the Commissioner have been subjected to checks and balances at every level insofar as he is not only required to record reasons but also communicate such reasons to the assesses, who may contest the same and defend himself. Further, such decisions are justiciable before the appropriate fora in the hierarchy provided in the Income Tax Ordinance. It is, therefore, argued that the objections raised by the petitioners against the notices in question are not only premature but also an effort to obstruct and delay a lawful process, which is required to be undertaken by the regulator to ensure that the trust reposed in the taxpayer by the law maker under the Universal Self-Assessment System ("USAS") introduced by the Income Tax Ordinance, 2001 is not abused or violated. 11.The Attorney General for Pakistan was put to notice under Order XXVII-A CPC. The learned Deputy Attorney General has made submissions on his behalf. He has adopted the arguments advanced by the learned counsels for the Respondents. He has, however, pointed out that having been given an independent power in terms of the amendments inserted in the Income Tax Ordinance. 2001 through Finance Act, 2010, the Commissioner has not been granted unbridled and unstructured discretion to select taxpayers for audit. He maintains that the power of the Commissioner to call for the record of any taxpayer for die purpose of conducting audit was always available to the Commissioner and continues to he available in view of the fact that the exercise of discretion by the Commissioner has already been defined and structured through cases reported as Messrs Syed Bhais (Pvt.) Ltd through Director vs. Central Board of Revenue, Islamabad through Chairman (old another (2007 PTD 239) and Ch. Muhammad Hussain and others vs. Commissioner of Income Tax (2005 PTD 152). He points out that certain observations made in the 2005 judgment ibid were struck down by the Hon'ble Supreme Court of Pakistan in its judgment reported as Commissioner of Income Tax and others. vs Fatima Sharif Textile, Kasur and others (2009 PT!) 37). However. at page 40 of the judgment, it was observed by the Hon'ble Supreme Court of Pakistan that the Commissioner may issue notice in terms of Section 177 disclosing reasons for selecting a person for audit on the criteria laid down in Chaudhry Muhammad Hussain's case ibid. He submits that the criteria laid down by the Hon'ble Supreme Court of Pakistan still holds field and is binding on the Commissioner who is obliged to disclose reasons for calling the record, give an opportunity to the taxpayer of being heard and in case he is dissatisfied with the explanation offered, he can proceed
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further to conduct an audit. He further maintains that even thereafter, opportunity of hearing to the taxpayer is available under Section 177(6) after completion of audit and Section 122(9) before an assessm ent is amended. He further submits that the intention of legislature has clearly and unambiguously been incorporated in the explanation inserted through Finance Act, 2013. After the said explanation, there can be no two views about the fact that the power of the Commissioner under Section 177 is independent of the powers of the Board under Section 214C and nothing contained in the said Section restricts the powers of the Commissioner to call for record or documents for audit and to conduct audit under Section 177. 12. I have heard the learned counsels for the parties and examined the record. 13. The following questions emerge from die arguments made at the bar: (i) Whether the impugned notices under Section 177 of the ITO were required to contain reasons for summoning the record to conduct audit of the taxpayers and non-disclosure of reasons should automatically lead to such notices being struck down? (ii) Whether the Commissioner could have issued notices under Section 177 of the ITO as substituted by Finance Act, 2010 for the tax year 2009? (iii) Whether notices under Section 177 of the ITO could be issued by the Commissioner without selection of the case of the taxpayer for audit by the Federal Board of Revenue in terms of Section 214-C of the ITO? 14. Before I proceed to address the aforenoted issues, I consider it necessary to trace the changes that Section 177 of the ITO has undergone over the past few years. The contents of Section 177 of the ITO remained unchanged except for minor changes between 2002 to 2008, which are neither material nor relevant to the cases in hand. However, in the years 2009, 2010 and 2013 changes/additions were introduced. These being relevant for the purpose of deciding the lis are being reproduced below for ease of reference: Finance Act, 2009: "177. Audit.--(1) The Board may lay down criteria for selection of any person or classes of persons for an audit of such person's income tax affairs by the Commissioner. (2)The Commissioner shall select a person or classes of persons for audit in accordance with the criteria laid down by the Board under sub-section (1). (3)The Board shall keep the criteria confidential. (4) In addition to the selection referred to in sub-section (2), the Commissioner may also select a person or classes of persons 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 (4) Any other matter which in the opinion of Commissioner is material for determination of correct income.(5) After selection of a person or classes of persons for audit under sub-section (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 such person or classes of persons. (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) or 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 such audits, particularly having regard to the factors in subsection (4). (8) The Board may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any person
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or classes of persons selected for audit by the Commissioner or by the Board and the scope of such audit shall be as determined by the Board on a case to case basis. (9) Any person employed by a firm referred to in sub-section (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that sub-section." Finance Act, 2010: "177. Audit.--(1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that-- (a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and (b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer: Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six years from the end of the tax year to which they relate. (2) After obtaining the record of a person under sub-section (1) or where necessary record is not maintained, 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 or any other person and may call for such other information and documents as he may deem appropriate. [Subsections (3) to (5) were omitted] (6) After completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under sub- section (1) or sub-section (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 such audits. (8) The Board or the Commissioner may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961) or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966), or a firm of Cost and Management Accountants as defined under the Cost and Management Accountants Act, 1966 (XIV of 1966) to conduct an audit of the income tax affairs or any person or classes of persons and the scope of such audit shall be as determined by the Board or the Commissioner on a case to case basis. (9) Any person employed by a firm referred to in sub- section (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that sub-section. (10) Notwithstanding anything contained in sub-sections (2) and (6) where a person fails to produce before the Commissioner or a firm of Chartered Accountants or a firm of Cost and Management Accountants appointed by the Board or the Commissioner under sub-section (8) to conduct an audit, any accounts, documents and records, required to be maintained under section 174 or any other relevant document, electronically kept record, electronic machine or any other evidence that may be required by the Commissioner or the firm of Chartered Accountants or the
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firm of Cost and Management Accountants for the purpose of audit or determination of income and tax due thereon, the Commissioner may proceed to make best judgment assessment under section 121 of this Ordinance and the assessment treated to have been made on the basis of return or revised return filed by the taxpayer shall be of no legal effect." 15. Through Finance Act, 2010, Section 214C was also inserted in the Income Tax Ordinance which provide as follows: "214C. Selection for audit by the Board.--(1) The Board may select persons or classes of persons for audit of Income Tex affairs 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 sub-section (1) shall be conducted as per procedure given in section 177 and all the provisions of the Ordinance, except the first proviso to sub-section (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 affairs." 16. In 2013 further amendments were incorporated in Section 214C through Finance Act, 2013. However, these amendments are not material for the decision of the matters before this Court, therefore, the same need not be discussed. However, an explanation inserted in Section 214C through Finance Act, 2013 is of considerable significance and has direct bearing on the matters before this Court. The same is reproduced below for ease of reference: "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 taxpayer for audit [emphasis added] and to conduct audit under section 177." 17. While examining the provisions of Section 177 ibid, it must be kept in mind that through the Income Tax Ordinance, 2001, the old system of preparation and submission of returns by an assessee and framing of assessm ent by income tax officers was discarded. A new scheme of self- assessm ent (USAS) was introduced through Section 120C of the Income Tax Ordinance, 2001 which provides as follows:-- "S.120 Assessments.--(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114 for a tax year ending on or after the 1st day of July, 2002.-- (a) the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and (b) the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished. (1A) Notwithstanding the provisions of sub-section (1) the Commissioner may conduct audit of the income tax affairs of a person under section 177 and all the provisions of that section shall apply accordingly. (2) A return of income shall be taken to be complete if it is in accordance with the provisions of sub-section (2) of section 114. (3) Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable income, as specified in the return, or short payment of tax payable) and directing him to provide such information, particulars, statement or documents by such date specified in the notice. (4) Where a taxpayer fails to fully comply, by the due date, with the requirements of the notice
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under sub-section (3), the return furnished shall he treated as an invalid return as if it had not been furnished. (5) Where, in response to a notice under sub-section (3), the taxpayer has, by the due date, nifty complied with the requirements of the notice, the return furnished shall be treated to be complete on the day it was furnished and the provisions of sub-section (1) shall apply accordingly. (6) No notice under subsection (3) shall be issued after the expiry of one hundred and eighty days from the end of the financial year in which return was furnished and the provisions of sub-section (1) shall apply accordingly." From the above, it is quite evident that the law maker reposed trust and confidence in the taxpayer in that if he furnished a complete return, such return would be taken to be an assessment order issued to the taxpayer by the Commissioner. However, the taxpayer could not have been given an unqualified and unquestionable right to file a return which would automatically be treated as deemed assessm ent and an order issued in favour of the taxpayer by the Commissioner. Such a carte blanche would have surely encouraged unscrupulous taxpayers to file erroneous or inaccurate returns to evade tax and thereby cause loss to the revenue of the State. In order to cater for that eventuality and to encourage the taxpayers to file accurate returns, a counterbalance had to be created so that while filing his returns, a taxpayer would be conscious of the fact that his return may be scrutinized by the competent authorities and if upon such scrutiny the return was found incorrect, legal consequences would follow. This caveat/safeguard was inserted in the Income Tax Ordinance, 2001 through Section 177 thereof by incorporating the power to conduct audit of the Income Tax affairs of a taxpayer under Section 177 ibid. 18. It may also be noted that this caveat and safeguard to protect the interests of the State has consistently been kept intact, in the form of conferring upon the Commissioner the power to call for records and on finding discrepancies conduct audit. However, such power of the Commissioner is neither unbridled nor unstructured. It has to be exercised in a manner and subject to die conditions provided in the ITO which would be discussed in the later…
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