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Petitioner: SHAHNAWAZ (PVT.) LTD. through Director Finance VS Respondent: PAKISTAN through the Secretary Ministry of Finance Government of Pakistan, Islamabad and another
Court Name: Sindh High Court Judge(s): Munib Akhtar, Muhammad Ather Saeed Title:SHAHNAWAZ (PVT.) LTD. through Director Finance vs PAKISTAN through the
Secretary Ministry of Finance Government of Pakistan, Islamabad and another Case No.: C.P. No,973 of 2010 Date of Judgment:2011-04-06 Reported As: 2011 PTD 1558 Result: Petitions accepted Judgment ORDER ' MUNIB AKHTAR, J.---By this common judgment, we intend disposing of a number of connected constitutional petitions, which raise important questions as to the proper interpretation and application of sections 177 and 214C of the Income Tax Ordinance, 2001 ("the 2001 Ordinance"). The necessary facts can be stated briefly. It appears that on or about 11-12-2009, a computer ballot was held at the head office of the Federal Board of Revenue ("F.B.R." or the "Board") to select companies and associations of persons for a "composite" income tax and sales tax audit. The tax year selected for this purpose was the tax year 2008. All the petitioners were selected for audit by means of the aforesaid ballot. Thereafter, the petitioners were served with notices under section 177 for the conduct of the audit, and for this purpose different chartered accountant firms were given the mandate to conduct the audits of the various selectees. It appears that the scope of the proposed audit was essentially the same in all cases. Being aggrieved by the computer ballot and the subsequent audit proceedings initiated against them, the petitioners have approached this Court seeking appropriate declaratory and injunctive relief. Their case is that the entire exercise being carried out is ultra vires the relevant provisions of the 2001 Ordinance. They submit that the computer ballot is liable to be quashed, with the consequence that no audit in terms thereof can be carried out, either for income tax or sales tax purposes. The material facts not being in dispute, the matter turns entirely on the proper interpretation and application of the relevant statutory provisions.
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2.. Mr. Iqbal Salman Pasha, learned counsel appearing for some of the petitioners, submitted that the Board did not have the power to select persons for an audit by computer ballot for the tax year 2008, whether under section 177 or section 214C. He contended that the Finance (Amendment) Ordinance, 2009, which had amended section 177 and which was promulgated on 28-10-2009, also did not confer the necessary statutory authority in this regard. He submitted that the "composite audit", which was being held pursuant to the computer ballot, meant an audit of both income tax and sales tax affairs, which could not be combined in this manner. Thus, according to him, the entire exercise was without lawful authority. Ms. Sana Minhas, who also appeared for some of the petitioners, made certain specific submissions with reference to section 214C, She submitted that this provision was only added by the Finance Act, 2010, and was of the same nature, as presently relevant, as section 31A of the Customs Act, 1969 inasmuch as both were inserted by or under provisions that deemed them "always" to be part of the relevant statute. She referred to Molasses Trading & Export (Pvt.) Ltd. v. Federation of Pakistan and others 1993 SCM R 1905, the leading case in relation to section 31A, and submitted that the position as regards section 214C was the same and hence the attempt to give retrospective effect to the latter section was as unsuccessful as was the attempt with regard to the former. She further submitted that subsection (1) of section 214C was a new provision, which had been added to the 2001 Ordinance for the first time. Thus, according to her, the retrospective effect of subsection (3) was only in relation to section 177, and did not apply o subsection (1). Her case was that subsection (1) was to be given a narrow interpretation and it certainly did not apply in relation to the tax year 2008. In any case, the taxpayers, including the petitioners, had acquired vested rights in relation to section 177 and the same could not be affected retrospectively. Her case was also that that section had to be applied as it stood on the last day of the tax year in question, which in the present case was 30-6-2008, the last day of the tax year 2008. Learned counsel also attacked section 214C as being violative of Article 25 since it could be applied in a discriminatory manner. This, was so because one lot of taxpayers could be chosen for audit of the same tax year under section 214C and another lot in terms of section 177, under which completely different considerations applied. She also challenged the concept of a "composite" audit, and submitted that there was no provision under law for any such exercise. 3. Dr. Farogh Naseem approached the matter from a somewhat different perspective, and submitted that in some of the cases (including those in which he appeared) the taxpayers had already been selected earlier for audit for the tax year 2008. However, those audits were abandoned by the Department itself when the computer ballot was held. He submitted that this was clearly a case of double jeopardy and the Department having already acted once, could not be allowed to suddenly drop pending proceedings and proceed on an altogether different basis to conduct the audit. In this context, he also placed reliance on Article 10A of the Constitution. The course adopted by the Board was, according to him, a clear violation of Article 10A and its requirement of a "fair trial". His case was also that the taxpayers acquired a vested right in the tax year when it ended, and the same could not be taken away or affected adversely in any manner, including by giving retrospective effect to the subsequently added provision. He also took exception to the scope of the intended audit. This was in terms of a "Tax Audit Framework" prepared by the Institute of Chartered Accounts of Pakistan (ICAP) and was to be applied uniformly in the case of all taxpayers selected through the computer ballot. Learned counsel submitted that this was also violative of the relevant statutory provisions. As regards the "composite audit", his case also was that this was impermissible, as neither the 2001 Ordinance nor the Sales Tax Act, 1990 made provision for any such audit. Mr. Abid Shirazi, learned counsel for some of the petitioners, also made submissions along the same lines as other counsel appearing in the matter. Learned counsel for the petitioners also pointed out that it was only the Federal Excise Act, 2005 which recognized the concept of a composite audit (in its section 46(5)). Thus, on any view of the matter,
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the entire exercise was wholly unlawful. In addition to the foregoing submissions, all the learned counsel also contended that no proper show-cause notice had been issued before the petitioners were selected for audit, and this also was a violation of settled legal principles relating to the requirements of a hearing. 4. Mr. Ali Mumtaz Shaikh, learned counsel for the respondents, submitted that the petitions were not maintainable. His case was the petitioners had only been selected for audit, and no adverse order had been passed against them. The mere initiation of proceedings was not sufficient to enable the petitioners to approach the High Court in constitutional jurisdiction. On the merits, he submitted that the Board had always had the power to select a case for audit, in terms of section 177(8). All that section 214C did was to particularize one method-that of selection by computer ballot---in respect of a power that had always existed. It was for this reason that subsection (3) expressly declared that it was only for the removal of doubts. It was merely a declaratory provision, which simply clarified the position regarding a power that had always vested in the Board. As regards the objections regarding the "composite audit", he submitted that this was not a legal term of art, but only an expression used for convenience. There was nothing in the 2001 Ordinance or the Sales Tax Act that prohibited the simultaneous conduct of audits in relation to income tax and sales tax matters. He reiterated that the respective audits would be conducted strictly in terms of the relevant statute. His case therefore was that the selection of the petitioners for audit was lawful and the audit proceedings entirely regular. He prayed that the petitions be dismissed. Mr. Jawaid Farooqui placed particular emphasis on section 177(8) as amended by the Finance Act, 2009 and the Finance (Amendment) Ordinance, 2009. His case was that the addition of the words "or classes of persons selected for audit by the Commissioner or by the Board" in subsection (8) had vested the Board with sufficient statutory power to hold a computer ballot on 11-12-2009 which was therefore perfectly regular and lawful. Mr. Sibtain Mahmud submitted that section 177 was merely part of the machinery provisions of the 2001 Ordinance, and it was well-settled that such provisions were to be liberally construed and could be given retrospective effect. Syed Riazuddin and learned D.A.-G. Also made submissions along lines similar to those of the other learned counsel for respondents. The learned counsel appearing for the respondents also submitted that there had been no violation of the principles of natural justice, and no requirement of first issuing a show- cause notice could be imposed in the circumstances of the case, where the petitioners had been selected by a random computer ballot. 5. We have heard learned counsel for the parties, examined the record with their assistance, and considered the case-law relied upon by them.' It will be convenient to first gather the relevant statutory provisions at one place. Section 177 of the 2001 Ordinance has gone through a number of changes, large and small, including a complete substitution. The major "stages" in the evolution, of this section need to be examined in some detail, and we reproduce these "stages" below: ' Stage I: The section as it stood amended up to the Finance Act, 2003:-- ' 177. Audit.---(1) The Commissioner may select any 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 that the Commissioner considers relevant. (1A) After selection of a person for audit under subsection (1), 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. (1B) After completion of the audit under subsection (1A) or subsection (3), the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit,
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amend the assessm ent under subsection (1) or subsection (4) of section 122, as the case may be. (2) 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 (1). (3) The Central Board of Revenue 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 and the scope of such audit shall be as determined by the Central Board of Revenue on a case by case basis. (4) Any person employed by a firm referred to in subsection (3) 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 subsection. ' Stage II:---The section was substituted in its entirety by the Finance Act, 2004. Thereafter, certain amendments were made to it by the following Finance Acts, and the section stood as follows up to the Finance Act, 2008: ' 177. Audit.--- (1) The Board 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 Board under subsection (1). (3) The Board 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 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 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 subsection (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 subsection. ' Stage III:---.Although only 'a few amendments, by way of addition, were made to the section by the Finance Act, 2009, these changes are important for present purposes, and therefore, the section, as so amended, is reproduced below in full, with the additions made highlighted by underlining: ' 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.
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(2) The Commissioner shall select a person or classes of persons for audit in accordance with the criteria laid down by the Board under subsection (1). (3) The Board shall keep the criteria confidential. (4) In addition to the selection referred to in subsection (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 (e) 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 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 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) 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, 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 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 subsection (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 subsection. ' Stage IV: The final stage is the section as amended by and up to the Finance Act, 2010. It may be noted that in between the Finance Acts of 2009 and 2010, the section was amended by two Finance (Amendment) Ordinances. Of these, the first, the Finance (Amendment) Ordinance, 2009, promulgated on 28-10-2009, is also the relevant for present purposes. The effects of these amending Ordinances were incorporated in the section by the Finance Act, 2010 (with some changes): ' 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.
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(2) After obtaining the record of a person under subsection (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 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 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 of 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 subsection (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 subsection. (10) Notwithstanding anything contained in subsections (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 subsection (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 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. 6. The other provision that needs to be considered is of course, section 214C. This was added by the Finance Act, 2010, and provides as follows:-- 214C. Selection for audit by the Board.---(1) 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. (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 affairs. 7. We begin by recalling three general principles of income tax law. The first of these has held the field for the last 90 years, i,e,, since the Income Tax Act, 1922 ("1922 Act"), and continues to do so under the 2001 Ordinance. This is the principle that each tax year (which corresponds to the "income year" and "previous year" of earlier income tax legislation) is a separate unit of assessm ent. This is one of the basic principles around which income tax law is structured. Insofar as is presently relevant, this has two consequences. Firstly, the audit of the "income tax affairs" of any person, whether under section 177 or section 214C, must be carried out with reference to a
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specific tax year. A Secondly, an audit can only be carried out once the tax year is complete and not before. In this sense, an audit is always retrospective. The second principle of income tax law is that income tax legislation, as applicable to a given tax year, is normally regarded as being the law as it B stands on the first day next succeeding the tax year. This principle requires a word of explanation. Section 74 of the 2001 Ordinance defines a tax year as meaning the twelve-month period ending on 30th June. This is called the "normal tax year", and it follows that in respect of such a tax year, the 2001 Ordinance will normally be regarded as applying as it stands on the 1st of July, the next succeeding day. A "special tax year" is defined in the same section as twelve-month period ending on a day other than 30th June. However, it is well-settled that even in relation to such a tax year, the 2001 Ordinance will be regarded as applying as it stands on the relevant 1st of July. In effect, what this means is that the 2001 Ordinance is regarded as applying in relation to a tax year as amended by the Finance Act of that year. The manner in which these principles apply to the issues at hand will emerge later in this judgment. 8. The third principle of income tax law was a central feature of both the 1922 Act and the Income Tax Ordinance, 1979 ("1979 Ordinance") and related to the manner in which income was assessed to tax. While a taxpayer was of course, required to furnish a tax return under both the preceding laws, it was for the taxation officer (or ITO as he was then called) to frame the assessment. The 1979 Ordinance did make provision for "self-assessment" in terms of section 59, but that was very much an exception to the general rule. The 2001 Ordinance has discarded the framing of assessment by the taxation officer, and has adopted what was earlier an exception---i,e,, self-assessment---as the general rule. Section 120, which is one of the key provisions of the current legislation, provides that the return filed by the taxpayer shall be deemed ("taken") to be an assessment order issued to the taxpayer by the Commissioner. Whereas earlier, the assessment exercise began with the filing of the tax return and ended with the assessment order of the taxation officer, it now begins and ends with the filing of the return. And this brings us to the central issue raised by the present petitions: the power…
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