Legal Principle & Question Decided

Ruling Summary: This decision was rendered by the Lahore High Court on 2021-12-31, officially reported as 2025 PTD 199. In this matter between D.G. Khan Cement Company Limited etc and The Federal Board of Revenue JUDGMENT, the court adjudicated key questions of statutory construction, procedural regularity, and legal precedent under Pakistani law.

Core Holding: The honorable bench evaluated governing statutory provisions and judicial authorities to establish the rights of the parties, delivering the binding reasoning set out below.

Full Judgment Text & Judicial Ruling

Court Name: Lahore High Court Judge(s): Abid Aziz Sheikh, Muzamil Akhtar Shabir Title:D.G. Khan Cement Company Limited etc vs The Federal Board of Revenue

JUDGMENT

Reported As: 2022 LHC 3288, 2025 PTD 199 Result: Petition Appeals allowed Judgment JUDGMENT ABID AZIZ SHEIKH, J. This judgment will also decide writ petitions and Intra Court Appeals (ICAs) detail of which is given in Appendix A, as common ques tions of law and facts are involved in all these petitions and ICAs. The legal proposition involved in all these cases is that whether the Commissioner Inland Revenue (Commissioner) could initiate proceedings against the petitioner 's/appellants in terms of section 25 of the Sales Tax Act, 1990 (Act) and section 177 of the Income Tax Ordina nce, 2001 (Ordinance), in the wake of Federal Board of Revenue (FBR) instructions/directions issued to the Chief Commissioner and other field formations for audit of various sectors. 2. Before we have a grip of the legal contentions on the basis of which the impugned orders and notices are challenged, it would be apposite to scan through the factual matrix in brief. Relevant facts are that number of assessees who are from various business sectors have been selected for audit by the Commissioners in pursuance to section 25 of the Act and section 177 of the Ordinance. However , subsequently it transpired that these selections for audit are sector-wise selection on the basis of instructions/dire ctions issued by the FBR to the Chief Commissioner and other field formations. Some of the petitioners in various sectors including OMCs, Edible Oil Manufacturers, Auto Industry , Aerated Water Manufacturers, Beverages, Traders of Electronics, Cement and Housing Societies, being aggrieved have directly filed these constitutional petitions challenging the audit selection mainly on the ground that FBR cannot interfere in the independent discretionary powers of the Commissioner to select and conduct audit. So far as these ICAs are concerned, the FBR issued letter dated 05.06.2020 to all Chief Commissioners for selection of sugar mills for audit in income tax, sales tax and federal excise duty. The said direction was apparently based on the report dated 21.05.2020 of the Sugar Inquiry Commission constituted by the Federal Government in terms of Pakistan Commissions of Inquiry Act, 2017 (Act of 2017). Some sugar mills filed objections against the said selection notices, which objections were however dismissed by the relevant

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Commissioners. The said sugar mills challenged the dismissal orders and selection for audit notices in various writ petitions including W.P. No.37213/2020, 38044/2020 and 38048/2020, however , these writ petitions were dismissed by the learned Single Bench on 23.09.2020, the appellants being aggrieved filed these ICAs. Subsequently writ petitions filed by other sugar mills were also clubbed with aforementioned ICAs, however , some of the similar writ petitions were again dismissed by the learned Single Bench on 20.01.2021, agains t which judgment, appeals were filed and clubbed alongwith these matters. 3. We now proceed to take note of the contentions of the respective parties. Mr. Raza Imtiaz Siddiqui, Advocate who is representing cement sector submits that in the letter dated 29.01.2021, FBR issued instructions/directions for audit selection of entire cement sector . He submits that in pursuance to said directions, the petitioners cement manufacturers were selected for audit. Contends that power of the FBR under section 25 of the Act and 177 of the Ordinance is independent power from the power of the FBR under section 72-B of the Act and 214-C of the Ordinance, therefore, no such directions could be issued to the Commissioners for sector-wise audit selection. He submits that such directions would amount to undermine and fetter the independent discretion and statutory power of the Commissioners for selection and conduct of audit. Mr. Shehzad Atta Elahi, Advocate representing the sugar sector in ICAs gave background of the matter and submits that audit notices under section 177 of the Ordinance and section 25 of the Act were issued by the Commissioners, however, subsequently it transpired that said notices were issued on the directions by FBR in revenue recovery drive. He submits that such directions impinge upon the independent statutory authority of the Commissioners for audit, hence impugned orders and notices are not sustainable. He submits that though this ground was not emphatically raised and argued in the constitutional petitions, due to lack of information at the relevant time, however, now these grounds are specifically raised in these ICAs. Mr. Mansoor Usman Awan, Advocate who is representing oil marketing companies and oil refineries in various writ petitions adopted the aforesaid arguments and further submits that selection for audit under section 177 of the Ordinance by the Commissioner and section 214-C of the Ordinance by the FBR are two independent methods of selection for audit. Submits that by issuing directives by the FBR to the Commissioners for audit selection and also giving time lines, both these independent processes of selection of audit have been compromised. He submits that no doubt mere selection of audit is not an actionable claim, however, the procedure prescribed under law for such selection of audit must be followed in its true spirit. Mr. Tanzeel ur Rehman, Advocate submits that directive issued by the FBR does not only affect the audit proceedings but also influence the assessment proceedings, which is not within the domain of FBR. He submits that FBR under section 214-C of the Ordinance can only select for audit but to conduct audit, the Commissioners shall exercise their independent powers under section 177 of the Ordinance. He therefore, submits that such directives and time lines could not be issued by the FBR to Commissioners even if selection of audit was under section 214-C of the Ordinance. The learned counsel for the remaining petitioners and appellants who are represen ting other sectors have adopted the above arguments. 4. Mr. Ahmad Pervaiz, Advocate assisted by Dr. Ishtiaq Ahmed Khan, CIR, LTO, Lahore on behalf of respondents submits that Inquiry Commission was constituted by the Federal Government under Act of 2017 to investigate the affairs of certain sugar mills due to complaint on exorbitant fixation of prices. Submits that the Sugar Inquiry Report dated 21.05.2020 was received by the FBR. Submits that on receipt of report, the FBR had three options i.e. to proceed under section 122(5) of the Ordinance or to proceed under section 122 (5-A) of the Ordinance or it could refer the matter for audit of these sugar mills. Submits that FBR decided to conduct audit and accordingly instructions were issued to the Chief Commissioner for the conduct of audit of suga r industries under section 177 of the Ordinance and section 25 of the Act with time lines. He submits that such instructions/directives could be issued by the FBR under Federal Board of Revenue Act, 2007 (FBR Act). He submits that under aforesaid instructions, the FBR only directed for desk audit and neither direction was issued for selection of all cases for audit nor there were any consequences presc ribed for not following the time lines given in the FBR directives. He, therefore, submits that the Commissioners concerned exercised their independent powers under section 177 of

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the Ordinance and section 25 of the Act and gave reasons for selection of audit, which does not suffer from any infirmity. He submits that after instructions/directions issued to the sugar industry by FBR, similar instructions/directions were also issued to other sectors for audit under section 177 of the Ordinance and section 25 of the Act but in no way the independent powers to conduct audit by the Commissioners were impinged upon in said directives. He submits that aforesaid aspect of the matter was not considered by the learned Sindh High Court or Islamabad High Court where similar audit selection was previously challenged and set aside. 5. We have heard learned counsel for the parties and perused the record with their able assistance. 6. The historic background of the Commissioner's power to select tax payers for audit remained subject to litigation even before repeal of erstwhile Income Tax Ordinance, 1979 (Repealed Ordinance). The said background has already been discussed in detail in Messrs Chenone Stores Ltd. through Executive Director (Finance Accounts) vs. Federal Board of Revenue through Chairman and 2 others (2012 PTD 1815 ), Pakistan Telecommunications Company Ltd. vs. Federation of Pakistan (2016 PTD 1484 ) and The Federal Board of Revenue and others vs. Messrs Chenone Stores Ltd. (2018 PTD 208) and need not be reiterated herein. However , for the purpose of lis in hand, it is expedient to explain the scheme of audit under the Ordinance. Repealed Ordinance envisaged assessment mechanism which was changed to self-assessment scheme under the Ordinance. Under section 120(1) of the Ordinance, the return of income tax filed by taxpayer is deemed to be assessment order , however , section 120(1A) provides that notwithstanding section 120(1), the Commissioner may conduct audit under section 177 of the Ordinance. Thus on one hand the prevailing law presumed the income declared by taxpayer in his return as deem assessment order but at the same time, powers are vested with the Commissioner under section 177 of the Ordinance to select and conduct for audit of any taxpayer . The purpose of audit under section 177 of the Ordinance is to ensure that self assessment scheme under the Ordinance may not be misused or abused by taxpayers. Unlike section 214-C of the Ordinance, which has to ensure general compliance with law by tax payer , section 177 of the Ordinance focus on the tax return of individual tax payers. 7. To better understand, the power of Commissioner and the FBR to select and conduct audit of income tax, it is expedient to reproduce sub-section (1), (2) and explanation of section 177 and section 214-C of the Ordinance as under:- "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. Explanation .--For the removal of doubt, it is declared that the powers of the Commissioner under this section are independent of the powers of the Board under section 214C and nothing contained in section 214C 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 this section.

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214C. Selection for audit by the Board. --(1) The Board may select persons or classes of persons for audit of Income T ax 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 T ax affairs. 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." 8. Similarly for audit of sales tax, sub-sec tion (1), (2) and explanation of section 25 and section 72B of the Act are reproduced hereunder: 25. Access to record, documents, etc.--"(1) A person who is required to maintain any record or documents under this Act [or any other law] shall, as and when required by [Commissioner], produce record or documents which are in his possession or control or in the possession or control of his agent; and where such record or documents have been kept on electronic data, he shall allow access to [the officer of Inlan d Revenue authorized by the Commissioner] and use of any machine on which such data is kept. (2) The officer of Inland Revenue authorized by the Commissioner , on the basis of the record, obtained under sub- section (1), may , once in a year , conduct audit: Provided that in case the Commissioner has information or sufficient evidence show ing that such registered person is involved in tax fraud or evasion of tax, he may authorize an officer of Inland Revenue, not below the rank of Assistant Commissioner , to conduct an inquiry or investigation under section 38: Provided further that nothing in this sub-section shall bar the officer of Inland Revenue from conducting audit of the records of the registered person if the same were earlier audited by the office of the Auditor -General of Pakistan. Explanation .--For the purpose of sections 25, 38, 38 A, 38B and 45A and for removal of doubt, it is declared that the powers of the Board, Commissioner or officer of Inland Revenue under these sections are independent of the powers of the Board under section 72B and nothing contained in section 72B restricts the powers of the Board, Commissioner or officer of Inland Revenue to have access to premises, stocks, accounts, records, etc. under these sections or to conduct audit under these sections. 72B. Selection for audit by the Board.--(1) The Board may select persons or classes of persons for audit of tax affairs through computer ballot which may be random or parametric as the Board may deem fit. (1A) Notwithstanding anything contained in this Act or any other law, for the time being in force, the Board shall keep the selection parameters confidential. (2) Audit of tax affairs of persons select ed under sub-section (1) shall be conducted as per procedure given in section 25 and all the provisions of this Act shall apply accordingly . (3) For the removal of doubt, it is hereby declared that the Board shall be deemed always to have had the power to select any persons or classes of persons for audit of tax affairs under this section. 9. Plain reading of above provisions manifest that these are independent power of audit of the Commissioner and FBR with separate methodology enumerated in above referred provisions. Under section 177 of the Ordinance and 25 of the Act, the Commissioner is required to apply his independent mind to each taxpayer individual case and if he decides to select a taxpayer for audit, he must give mindful and legitimate reasons arising out from record. On the other hand, purpose of section 214-C of the Ordinance and section 72-B of the Act is to ensure general compliance of the law by taxpayers. The FBR under section 214-C of the Ordinance and section 72-B of the Act may select a person through random parametric ballot, however , there is no room in section 214-C of Ordinance or 72-B of the Act, for FBR to direct Commissioners to select assessee for audit under section 177 of the Ordinance

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or section 25 of the Act, as it will amount to usurp the independent power of the Commissioner under section 177 of the Ordinance and 25 of the Act. This legal position is also reiterated by the legislation by adding explanation to section 177 of the Ordinance and 25 of the Act through Finance Act, 2013. 10. It is admitted on all hands that FBR issued similar instructions and time lines for completion of audit for various sectors including cement, sugar , auto parts, co-operative housing societies, ceram ic tiles, tobacco, beverages and fertilizers etc. These directives by FBR are more or less identical , however for ready reference, one of such directive issued to cement manufacturers dated 29.01.2021 is reproduced hereunder:- Government of Pakistan Revenue Division Federal Board of Revenue (Inland Revenue) F.No.1(44)SEC-ST-OPS/2020/15180-R Islamabad 29 Jan. 2021 To Chief Commissioners-IR i. LTO Karachi, Lahore. Islamabad ii. MTO Karachi iii. CTO Karachi, Lahore, Islamabad iv. RTO Peshawar Subject: Timelines For Completion of Audit- Cement Sector I am directed to refer to the Video Link Conference (VLC) conducted on 26 Jan. 2021 on the captioned subject and to state that the Board is pleased to set the following timelines for completion of audit under sales tax & income tax heads in respect of cement manufacturers falling under respective jurisdictions:- Sr.No.Action Timeline By whom 1 Desk Audit/Requisition of all 3rd Party Information20th Feb, 2021 DCs/ADCs 2 Selection for audit 25th Feb, 2021 CIRs 3 Issuance of Audit Reports 25th March, 2021 DCs/ADCs 4 Issuance of SCN 25th April, 2021 DCs/ADCs 5 Reply of the RPs & rebuttal 25th May, 2021 DCs/ADCs 6 Assessment Orders 25th June, 2021 DCs/ADCs 7 Final Report to FBR 30th July, 2021 CCIRs/CIRs 2. I am further directed to state that Video Link Conference (VLC) under the Chair of Member IR-Ops will be held on 9th Feb, 2021, Tuesday, to discuss updated status of the abovementioned tasks vis-a-vis/progress on Desk Audit, & requisition of 3rd Party information by the timelines fixed. (Zubair Khan) Secretary ST (IR Operations) Cc (i) SA to Member IR-Operations, FBR, Islamabad (ii) Chief ST -Operations, FBR, Islamabad (iii) Secretary Administration. FBR Islamabad 11. Bare reading of the above directive shows that Chief Commissioner Inland Revenue and other field formation were given instructions for completion of audit under the sales tax and income tax in respect of the entire sector which in this directive was cement manufacturers. The said directive also gave exact time lines commencing from desk audit till final report to be submitted to the FBR after the assessment orders. Admittedly all impugned orders and notices of audit were issued by the Commissioners to various sectors after the aforesaid similar directives by the FBR. No doubt in the impugned notic es and orders for audit, these directives by the FBR are not referred to specifically , however , there is no dispute that audit proceedings in these sectors were initiated and triggered by theth

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Commissioners concerned in pursuance to these directives issued by the FBR. The legal position which is well settled is that when a particular authority is vested with the power to discharge statutory duty, like the Commissioner who is empowered under section 177 of the Ordinance and section 25 of the Act to select and conduct for audit, then it is that authority alone, who has to apply its independent mind and arrive at its own conclusion without being influenced by any other authority much less higher authority like FBR. Under section 177 of the Ordinance and section 25 of the Act, the discretion lies with the Com missioner to initiate the audit proceedings to select and conduct audit on the basis of available record and to arrive at this conclusion, he is not to be controlled even by the higher authority , likewise the higher authority is not to interfere with the independent power of the Commissioner which is statutorily conferred upon him. 12. It is settled law that while exercising discretion, the authority has to maintain independence and impartiality . The authority upon whom discretionary power has been conferred, cannot act at the dictates of higher and other authority . When the discretion is conferred upon the authority , it is that authority alone who has to exercise discretion by its own independent mind after taking into consideration all relevant factors and the object of conferring such a discretion. Such authority should not be influenced by improper motive or improper purpose and must not allow their personal interest and beliefs to influence them in the exercise of their statutory powers, but must exercise those powers impartially and should not pre-judge the case. Even the higher authority cannot provide any guide line or direction to the authority under the statute, to act in a particular manner . It is also salutary principle of law that a quasi-judicial authority cannot afford to act on the direction of a superior officer or authority . Once a discretion is vested with a certain authority , he alone should exercise that discretion vested under the statute and if he acts in accordance with "the direction or any compliance with some higher authorities instruction" it would be a case of failure to exercise discretion altogether . In other words by following FBR directions, the discretion vested in the Commissioners under Section-177 of the Ordinance and Section 25 of the Act, was not exercised by the concerned Commissioners at all. 13. In similar situation, the Hon'ble Supreme Court of Pakistan, In the matter of Human Rights Case No.3654 of 2018 , held as under:- "Government officials are duty bound to discharge their functions independently and are not to be influenced by dictatorial misuse of powers and/or dictated exercise of discretion. In our view the instant matter is a clear cut case of dictated exercise of direction. At the cost of repetition, "it is now a well-settled principle of law that all public functionaries must exercise public authority, especially while dealing with the public property, public funds or assets in a fair, just, transparent and reasonable manner, untainted by mala fide without discrimination and in accordance with law, keeping in view the Constitutional Rights of the Citizens." Similarly the Division Bench of this Court in "Mayzone Pak International Vs. Additional Secretary , Government of Pakistan" ( 2002 CLC 388 ) held as under:- "It is established principle of the administration of justice, which is extended to the administrative decisions as well, that if the law enjoins upon a particular functionary/authority to exercise a particular jurisdiction, it should be exercised by the said functionary/authority independently on application of its own mind. If any judicial/quasi - judicial or even administrative discretion is not exercised independently and on application of mind by the functionary/authority who is enjoined under the law to exercise the discretion and the proceeding is controlled or decision is dictated it would amount to non-exercise of jurisdiction by the authority/functionary vested with the jurisdiction and wrong exercise of jurisdiction by an authority not vested with the jurisdiction. All such proceedings shall always be deemed to be invalid, nullity in law and of no legal effect. There is another salutary principle of law that the things should be done as they are required to be done or not at all. If unde r a scheme of statute something is required to be considered and decided on judicial/quasi-judicial proceedings then the matter should be decided accordingly , without any interference from any higher or superior authority or under any administrative instruction. 14. In such like situation Indian Supreme Court in "Joint Action Committee of Air Line Pilots Association of India (Alphai) and others Vs. Director General of Civil Aviation and other" (201 1(5) SCC 435) held as under:- "The contention was raised before the High Court that the Circular dated 29.5.2008 has been issued by the…

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