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Petitioner: NESTLE PAKISTAN LTD. and others VS Respondent: FEDERAL BOARD OF REVENUE and others
Court Name: Lahore High Court Judge(s): Shahid Jamil Khan Title: NESTLE PAKISTAN LTD. and others vs FEDERAL BOARD OF REVENUE and others Case No.: W.P. No,52597 of 2015 Date of Judgment:2017-01-09 Reported As: 2017 PTD 686 Result: Order accordingly
JUDGMENT
JUDGMENT ' SHAHID JAMIL KHAN, J.---This judgment shall also decide connected Writ Petitions, enlisted at the bottom of this judgment, as all the petitioners felt aggrieved of selection for audit, through Random Ballot, by Federal Board of Revenue ("FBR") under Audit Policy, 2015 ("Audit Policy"). The petitioners have challenged the Audit Policy, the Ballot conducted on 14.09.2015 and issuance of respective notices after the selection. 2. The impugned Ballot was conducted by FBR, exercising authority conferred under provisions of three "Federal Taxing Statutes" i,e,, Section 214C of Income Tax Ordinance, 2001 ("Ordinance of 2001"), Section 72B of Sales Tax Act, 1990 ("Act of 1990") and section 42B of Federal Excise Act, 2005 ("Act of 2005"). Impugned selection was made for audit, of the declarations in respective returns, of Tax Year 2014 relating to Income Tax and corresponding Tax Period(s), i,e, from July 2013 to June, 2014 regarding Sales Tax and Federal Excise Duty. ' The impugned Audit Policy, 2015, as per its scope mentioned therein, has set out procedures and guidelines for processing the cases of persons and/or classes of persons, selected through impugned Random Ballot. The Ballot was carried out on data, separately for each type of the federal tax, after exclusion of the cases mentioned in Part 6 of the impugned Policy. 3. Main thrust of the arguments by petitioner's side, besides raising numerous technical and legal objection, was that the impugned selection for audit through random ballot is made by ignoring the judgment of this court in the Defence Housing Authority v. Commissioner Inland Revenue and others (2015 PTD 2538). The judgment in the DHA case was delivered to resolve the dispute regarding selection for audit on parametric basis. Scope of audit was discussed briefly and by placing reliance on judgment in Amanullah Khan and others v. The Federal Government of Pakistan
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through Secretary, Ministry of Finance, Islamabad and others (PLD 1990 SC 1092), FBR was asked to structure its discretionary powers given under Section 214C of the Ordinance of 2001 and parallel provisions under other Federal statutes. Petitioners claimed that impugned selection without framing rules is illegal, whereas respondent's side argued that the obiter dictum in the DHA case judgment has been taken care of while framing 'the Audit Policy 2015'. Both sides read different parts of the Audit Policy in support of their respective assertions, however, the representatives of FBR, during proceedings of case, undertook and framed 'Rules for Selection and Conduct of Audit', under each statute separately. Framing of the rules was without prejudice to their claim that the discretion had been structured in 'the Audit Policy, 2015' keeping in view the guidelines given in Amanullah Case cited supra. 4. Arguments by number of learned Advocates, from both sides, were heard and recorded during proceedings. It is an admitted position that judgment in the DHA case was not challenged by either side, therefore, holds the field. Taxpayer's duty of making true declaration by comply with the provisions of law was discussed in said judgment, besides holding that the State through FBR has a right to tax and audit the declarations in tax returns. However, certain other aspects have surfaced during arguments which are being considered in this judgment. Since the findings already given in the DHA case are stepping stone for examination of the issues, therefore, relevant excerpts, from the judgment are reproduced:-- "5. The explanation given by Director (Law) FBR is tot in consonance with spirit of law. Subsection (7) of Section 177, is reproduced hereunder:-- "177. Audit- (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." [emphasis added] ' A person audited in a year, can again be selected for audit in the next and following years, where there are reasonable grounds available. It appears that FBR has not understood the spirit of audit under section 177 read with Section 214C of the Ordinance and parallel provisions under the other statutes. Section 177 reveals that the Commissioner may call for record or documents, maintained under the Ordinance, for conducting an audit of person's income tax affairs. ' The record, which can be called for audit is the one maintained under Section 174 of the Ordinance of 2001. Under its subsection (3), the record shall be maintained for six years. It means, after selection for audit, record of last six years can be called for audit. Subsection (2) of Section 174 authorizes the Commissioner to disallow or reduce taxpayer's claim of deduction if taxpayer is unable to produce the supporting documents/evidence. The Commissioner, under subsection (6) of section 177 is required to obtain explanation, if claim of an expense, deduction or allowance is not supported by any evidence or is found to have been claimed against provisions of the Ordinance of 2001. If satisfactory explanation is not provided, after issuance of notice under Section 122, the assessm ent or assessm ents of the years, record of which is audited, can be amended under section 122(1) or (4) subject to other relevant provisions of same section. 6. Section 214C was inserted in the statute book by Finance Act, 2010. Subsection (1) of which is reproduced hereunder:- "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." ' The powers given to the Board are not new, such powers were available to the Board under section 59 of the Repealed Income Tax Ordinance, 1979. The Board could select "persons" or "classes of persons" for total audit (for assessm ent under normal law) by ousting the taxpayers from Self Assessm ent Scheme. The Scheme, under Ordinance of 2001, of treating the return filed by
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a taxpayer as assessm ent order under section 120, is called, generally, as Universal Self Assessment Scheme. FBR has again been given power under section 214C to select a "persons" or "classes of persons" for audit through computer ballot on random or parametric basis. ' Selection through random balloting is relatively less controversial, yet some small taxpayers are selected for audit and potential cases are skipped. ' The Board, it appears, is unable to evolve an undisputed and transparent policy for selection of cases for audit on parametric basis. Examination of impugned parameters shows that even minor variations, as compared to previous year's declarations, are made basis for selection of cases. The plea of attaching stigma as raised in JDW Sugar Mills' Case (supra), is also a matter of concern which is to be considered by the FBR. 7. Basic characteristic of State, as envisaged in Article 7 of the Constitution of Islamic Republic of Pakistan, 1973 is its power to impose tax or cess. Article 77 says that tax shall be levied by or under the authority of Act of Parliament. It is corresponding duty of every citizen or person (as defined in Article 260 of the Constitution) to pay tax in accordance with law (Act of Parliament). Universal Self Assessm ent Scheme, under Ordinance of 2001, cannot be construed to have given a carte blanche to taxpayers, who may declare the tax payable as per their whims. A confidence is reposed on the taxpayer, presuming that payable tax declared in the income tax return is in accordance with law. It is right of the State to audit income tax affairs of a person, at least once in six years, hence his selection for audit cannot be termed as detrimental to his Lights." 8. Instead of rewriting the arguments from both sides, those are discussed and dealt with issue wise. ' First issue, as raised by Mr. Imtiaz Rashid Siddiqui, Advocate, is that selection under Section 72B of the Act of 1990 is in violation of section 50 of the Act of 1990. He argued that without framing Rules under its subsection (1), the FBR could not exercise power to select taxpayers for audit, besides arguing that impugned selection is against the directions given in the DHA Case. ' His arguments were adopted and extended by other learned counsel appearing for petitioner's side. ' The arguments were opposed by Mr. Sarfraz Ahmad Cheema, Advocate, appearing for respondent's, side by submitting that non-framing of Rules does not render the Statute as nugatory or unworkable. He added that the provisions of Section 72B are self-executing as no intention of exercising the powers by framing Rules is appearing from its language. ' His arguments were endorsed by the other learned counsel appearing for the respondents. 6. Language of Section 72B and Section 50 of the Act of 1990, is examined, along with corresponding provisions in other two Federal Statutes. Subsections (1) of the corresponding sections are found verbatim. Section 72B is reproduced for ready reference:- "72B. Selection for audit by the Board. ---(1) The Board may select persons or classes of persons for audit for tax affairs through computer ballot which may be random or parametric as the Board may deem fit. (2) Audit of tax affairs of persons selected under subsection (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 person or classes of persons for audit of tax affairs under this section." Similar language, with necessary changes, is used in section 42B of the Act of 2005 and verbatim subsection (1) of section 214C of the Ordinance of 2001 has already been discussed in the DHA Case figment. 7. Language of the provisions ibid do not suggest for further or supplementary legislation. Even language of Section 50(1) of the Act of 1990, which bestows general rule making power to FBR, contains the word "may", conferring discretion upon the Board to make Rules for carrying out the
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purposes of the Act. Similar discretion is found invested in corresponding provisions i,e,, Section 237 of the Ordinance of 2001 and Section 40 of the Act of 2005. ' The issue relating to self-executing provision was examined by Hon'ble Supreme Court of Pakistan in Hakim Khan and 3 others v. Government of Pakistan through Secretary Interior and others (PLD 1992 SC 595). Power of President to commute death sentence and repugnancy of some statues, after insertion of Article 2A in the Constitution of the Islamic Republic of Pakistan, 1973 ("Constitution"), was brought into question. The Hon'ble Court, while holding that Article 2A is not self-executing, quoted a passage from Bindra's Interpretation of Statutes, 7th Edn. The passage from 10th Edn. Of same book is reproduced hereunder:- "A Constitutional provision is self-executing if it supplies a sufficient rule by means of which the right which it grants may be enjoyed and protected, or the duty which it imposes may be enforced without the aid of a legislative enactment. It is within the power of those who adopt a Constitution to make some of its provisions self-executing, with the object of putting it beyond the power of the legislature to render such provisions nugatory by refusing to pass laws to carry them into effect. Where the matter with which a given section of the Constitution deals is divisible, one clause thereof may be self-executing and another clause or clauses may not be self-executing. Constitutional provisions are self-executing when there is a manifest intention that they should go into immediate effect, and no ancillary legislation is necessary to the enjoyment of a right given or the enforcement of a duty imposed. That a right granted by a constitutional provision may be better or further protected by supplementary legislation does not of itself prevent the provision in question from being self-executing, nor does the self-executing character of the constitutional provision necessarily preclude legislation for the protection of the right secured. A constitutional provision, which is merely declaratory of the common law, is self-executing. A constitutional provision designed to remove an existing mischief should never be construed as dependent for the efficacy and operation on legislature. Constitutional provisions are not self-executing, it they merely indicate a line of policy or principles, without applying the means by which such policy or principles are to be carried into effect, or if the language of the Constitution is directed to the legislature, or it appears from the language used and the circumstances of its adoption that subsequent legislation was contemplated to carry it into effect. Provisions of this character are numerous in all Constitutions and treat of a variety of subjects. They remain inoperative until rendered effective by supplemental legislation. The failure of the legislation to make suitable provision for rendering a clause effective is no argument in favour of self-enforcing construction of the clause. Self-enforcing provisions are exceptional. The question, whether a constitutional provision is self-executing, is always one of intention, and to determine intent, the general rule is that courts will consider the language used, the object to be accomplished by the provision, and surrounding. Circumstances. Extrinsic matters may be resorted to where the language of the Constitution itself is ambiguous.[emphasis supplied] ' A passage, in the 10th Edn. Of NS Bindra's Interpretation of Statues, has dealt with self-executing provisions relating to fiscal legislations, which is also reproduced being relevant to the subject of this judgment:- "A constitutional provision authorising the levy of a tax is without effect, unless provision for such levy is made by the legislature, but, it fully supplemented by legislation in force at the time of its adoption, it takes effect at once. A provision requiring the legislature to levy a tax at a certain rate has been held self-executing. Provisions that property shall be assessed for taxes under general law and by uniform rules according to its value are self-executing. Moreover, a provision has been held self-executing, which authorised the levy by local officers of a tax to an amount and for purposes specified, subject to compliance with conditions fully stated therein. A constitutional provision limiting the rate of taxation does not require legislative action to enforce it and goes into
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effect at once, unless it appears from a consideration of the whole instrument that it was the intent of the framers to postpone the operation of the provision until action by the legislature. ' Provisions authorising municipal authorities to levy taxes, providing for an increase in the rate in taxation on submission to a vote of the taxpayers, or for assessments by a jury or by commissioners, requiring the legislature to provide a uniform system of taxation, declaring that all taxes shall be uniform to be collected under general laws, declaring that all property shall be taxed in proportion to its value, 'to be ascertained as provided by law,' providing for the payment of certain taxes into the common school fund and for their distribution, declaring that certain kinds of property shall be taxable as provided by law, requiring provision to be made by general laws to prevent the abuse by municipal corporations of the. Powers of taxation and contracting debts and provisions for the collection of taxes without suit are not self-executing and require supplemental legislation to render them effective. A provision fixing the minimum amount at which patented mining claims shall be assessed is self-executing. Constitutional provisions declaring certain classes of property exempt from taxation are self-executing; but provisions authorising the legislature to exempt specified classes of property, or requiring the exemption of certain property from taxation by general law, are not operative until such legislation is enacted. In all of the cases on this subject, if it appears from the provision that anything remains to be done to complete the objects contemplated, it is to that extent is inoperative, and will remain so until all such requirements are complied with." [emphasis supplied] ' Supreme Court of United States in SOSA v. Alvarez-Machian ET AL [542 U.S. 692 (2004)], held that substantive provisions of `International Covenant on Civil and Political Rights' are not self-executing because United States ratified the Covenant on the express understanding that it was not self- executing and so did not itself create obligations enforceable in the federal courts. In another judgment. South-Central Timber Development, Inc. v. Wunnicke, Commissioner, Department of Natural Resources of Alaska, ET AL. [467 U.S. 82 (1984)], the Commerce Clause in American Constitution was interpreted as self-executing, while limiting the power of States to, legislate, which caused burden on interstate and foreign commerce, relevant excerpt is reproduced:-- "Although the Commerce Clause is by its text an affirmative grant of power to Congress to regulate interstate and foreign commerce, the Clause has long been recognized as a self-executing limitation on the power of the States to enact laws imposing substantial burdens on such commerce." Though the noted references have dealt mostly with the constitutional provisions, yet NS Bindra has quoted references where the discussed Rules of interpretation are applied on statutory provisions as well. It is recapitulated that a provision is self-executing if rights granted or duties imposed are enforceable in absence of any supplementary legislation; in other words if manifest intention is found in language of the provision that power conferred should go into immediate effect and no ancillary legislation is necessary, then the provision is self-executing. The provision is not self- executing if it indicates merely a line of policy or principles, without giving means by which such policy or principles are to be carried into effect, or it is directed in the provision for framing of Rules through delegated powers to enforce the rights, duties or powers given therein. 8. In. Jahangir Mirza v. Government of Pakistan (PLD 1990 SC 1013) the Apex Court reiterated its earlier decision given in M. U. A. Khan v. Rana M. Sultan and another (PLD 1974 SC 228), holding that non-framing of Rules does not render a Statute as a nugatory or unworkable unless the legislation indicates an intention to this effect in clear and unmistakable term, relevant excerpt from the judgment in M. U. A. Khan's Case (ibid) is reproduced hereunder:-- "It is universally recognised that as regulatory statutes have to deal with a variety of situations and subjects, it is not possible for the Legislature itself to make detailed regulations concerning them, and, therefore, the Legislature delegates its power to specified or designated authorities to make
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such detailed regulations, consistent with the statute, for carrying out the purposes of the parent legislation. The power so conferred is generally in the nature of an enabling provision, intended to further the object of the statute, and not to obstruct and stultify the same. As a consequence, the failure or omission of the designated authority to frame the necessary rules and regulations, in exercise of the power conferred on it by the Legislature, cannot be construed as having the effect or rendering the statute nugatory and unworkable. Such an eventuality could arise only if the Legislature indicates an intention to this effect in clear and unmistakable terms." [emphasis supplied] For what has been discussed above, the arguments by petitioner's side fail on this ground. Perusal of the Sections 72B, 214C and 42B of the Federal Taxing Statues, in light of discussion supra shows that these are self-executing provisions because, the power and manner of exercising the power has been provided therein, without use of any word showing intention for further/subordinate legislation to carry out the selection. FBR has been empowered to select persons or classes of persons for audit through computer ballot, with additional discretion that the ballot may be parametric or random as the Board may deem fit. 9. Nevertheless, the discretionary powers, even under a self-executing provision, need to be structured to ensure just, fair and E transparent exercise of discretionary powers, because it has so been ordained by Apex Court of this Country in Amanullah Case (supra), Government of NWFP through Secretary and 3 others v. Majee Flour Mills (Private) Limited (1997 SCM R 1804), and Muhammad Amin Muhammad Bashir Limited v. Government of Pakistan through Secretary Ministry of Finance, Central Secretariat, Islamabad and others (2015 SCM R 630), which in view of Article 189 of the Constitution is declared law of the land. The directions in the DHA Case, which are termed as obiter dictum by respondents side, were given on the strength of August Court's authoritative pronouncements, therefore, were and are binding on FBR and authorities subordinate to it. Failure on part of FBR to regulate the discretionary powers may not render the exercise of the power as illegal ab initio, yet Courts would tend to intervene if the exercise of discretionary power appears to be arbitrary and capricious. 10. Before examining whether the selection in question was made after structuring discretion through Audit Policy, 2015, relevant portion from the DHA Case is reproduced for reference`.- "Nevertheless, power of FBR to select for audit is not unbridled, the discretion has to be exercised justly, fairly and in transparent manner. The Apex Court in Government of NWFP through Secretary and 3 others v. Majee Flour Mills (Private) Limited (1997 SCM R 1804), while following its earlier decision in Amanullah Khan and others v. The Federal Government of Pakistan through Secretary, Ministry of Finance, Islamabad and others (PLD 1990 SC 1092), has reiterated the doctrine of "structuring the discretion". ' Doctrine of structuring discretion was explained in Amanullah Khan's case, in following words:-- "structuring discretion only means regularizing it, organizing it, producing order in it so that decision will achieve the high quality of justice." ' Seven instruments were highlighted, which are useful to structure discretionary power i,e, "open plans, open policy statement, open rules, open findings, open reasons, open precedents and fair in formal procedure" Framing of Rules to regulate the discretionary power was emphasized. The expression of Hon'ble Court is reproduced:-- "the wide-worded conformant of discretionary powers of reservations of discretion, without framing rules to regulate its exercise, has been taken to be an enhancement of power and it gives that impression in the first instance but where the authorities fail to rationalize it and regulate it by Rules, or Policy statement or precedents, the Courts have to intervene more often, than is necessary, apart from the exercise of such power appearing arbitrary and capricious at times."
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' Needless to say that FBR is bound to structure the discretion vested in it under Section 214C of the Ordinance and under parallel provision of Sales Tax Act, 1990 and Federal Excise Act, 2005. Federal Government, so far, has not been able to frame Rules to regulate FBR's discretion and FBR has not given any procedure. A taxpayer, selected for audit is left on the mercy of an unskilled audit officer for conducting audit. I am constrained to observe that FBR's tax year based selection for audit is tainted with an intention to achieve budgetary targets, therefore, is creating panic amongst the taxpayers, who are rushing to Courts after their selection. One of the reasons for challenging each case of selection under audit appears that department has not come out of the mind set of assessm ent under the Repealed Ordinance of 1979. After selection of taxpayers, the additions are made on gross-profit and parallel cases basis. Even estimations are made, which are alien to the new concept of amending assessm ent under Ordinance of 2001. ' It is reiterated that primary object of audit is to create deterrence for the taxpayers. Taxpayers, besides having confidence in audit procedures, should believe that they would be penalized and subjected to additional tax, if wrong declaration is detected…
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