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Petitioner: Atlas Honda Ltd VS Respondent: Pakistan & others
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui, Mahmood A. Khan Title: Atlas Honda Ltd vs Pakistan & others Case No.: C.P. No.D-5107 of 2021 Date of Judgment:2022-02-18 Reported As:2022 SHC 21, PTCL 2022 CL. 253, 2022 [M] CLR 848, 2022 PCTLR 905, 2022 PTD
JUDGMENT
JUDGMENT Muhammad Shafi Siddiqui, J. Root cause of this bunch of petitions is sectoral audit notices of FBR which triggered proceedings under section 177 of Income Tax Ordinance, 2001 (hereinafter referred to as "Ordinance 2001") on issuance of notices by Commissioner , violating rights of petitioners, as claimed. 2. For the sake of brevity , arguments raised by petitioners' counsel have been summarized collectively without any disrespect to any of them. 3. With their grievance of sectoral audit, counsels for petitioners argued that under the scheme of Ordinance 2001, FBR has the power to select a taxpayer for an audit under section 214C based on a random or parametric ballot, whereas Commissioner has the power to select a person for an audit under section 177 after applying mind and providing reasons for such selection. The counsel emphasized that powers under the two provisions are independent. They argued that on numerous occasions Courts undisputedly held that powers of the Commissioner to select a person for audit under section 177 are independent of the powers of the FBR to select a person for an audit under section 214C of the Ordinance 2001. The distinction is also apparent that in the later, the FBR may select a taxpayer through a random or parametric ballot whereas in the former the Commissioner examines the contents of return and form independent legitimate reasons for scrutiny through audit. 4. Mr. Metlo, learned counsel appearing for respondents/ department, on the other hand, submitted that writ against such cause i.e. audit would not lie, Article 199 could only be enforced against specific right , which is being violated and since "audit denial" is not a right of taxpayer , neither it (audit) takes away any of the taxpayer's right, therefore no writ is maintainable . The audit is just procedural scrutiny and the remedies under statute could be exhausted at the relevant time. He added that proceedings under section 177 are not amenable to writ jurisdiction . He further argued that reasons provided by the Commissioner not necessarily found justiciable for taxpayer as1 2 3 4
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such discretion rests upon Commissioner and taxpayer's intervention for justiciable reason is uncalled at this stage of calling documents to conduct audit . 5. Learned Deputy Attorney General Mr. Kafeel Ahmed Abbasi has relied upon Section 213 and 214 of Ordinance 2001 and section 4 of FBR Act 2007. He submitted that it is the Federal Board which may give guidelines and policies which are binding on the subordinate officials of the Board and the impugned directions of sectoral audit cannot be read as usurping the independent rights and independence of the Commissioner as available to him under section 177 of Ordinance 2001. He relied upon the case of Elahi Cotton . 6. The effective question arising out of these petitions is whether the Commissioner can select taxpayer for an audit under section 177 of Ordinance 2001 on the directions of Federal Board of Revenue based on sectoral audit? 7. We have heard the learned counsel and perused material available on record and after thoughtful consideration formed a view about independence and independent provisions i.e. 177 and 214C of the Ordinance 2001 and our analysis are discussed as under: 8. The question of independent powers of Board and Chairman under sections 214C and 177 of Ordinance 2001 came before different benches and the most recent, which also embarked upon sectoral audit is of Islamabad High Court in the case of Pakistan Tobacco . 9. Audit has always remained a matter of concern for taxpayers and at times genuinely and at times just to prolong, drag and gain time, proceedings were initiated by taxpayer challenging their selection for audit on dif ferent counts. 10. The audit is a highly time consuming and cumbersome exercise and the legislature in its conscious approach has carved out different mechanisms for achieving the end results. Section 214C of the Ordinance 2001 is now made to stand against section 177 in the current dispute. For the purposes of understanding true spirits, Sections 177 and 214C of ibid Ordinance 2001 are reproduced 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 authorize d 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 necessa ry 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. ..... Section 214C 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 .5 6 7
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(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 Com missioner 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." 11. A conscious and careful reading provides that these are independent powers with independent schemes as enumerated thereunder . The purpose of Section 214C is to ensure general compliance with the law by the taxpayers whereas Section 177 examines the veracity of a specific taxpayer's return based on Commissioner's own understanding and determination that the return requires such scrutiny and examinations. It is by now a settled law that the powers of the Commissioner to select a person for an audit under section 177 are independent of the powers of FBR to select a person for an audit under section 214C of the Ordinance 2001. Though there is no cavil to such proposition, the question being raised and answerable is whether any direction given by the Board, which may question the independence of the Commissioner's role entrusted to him under section 177, could also be legitimized on the strength of Section 213, 214 and 214C of the Ordinance 2001 and/or other provisions including section 4 of FBR Act 2007. 12. Under section 177 Commissioner is required to apply his mind and provide reasons for selection whereas under section 214C FBR may select a person through random parametric ballot. If a taxpayer is not selected in balloting then it (FBR) cannot direct the commissioner to select a taxpayer for an audit as this would defeat entire legislative scheme of separating the powe rs of the Commissioner and FBR in relation to audit selection by directing the commissioner to select certain taxpayer for audit. FBR in a situation of ballot failure would be seeking to do indirectly what it cannot do in the faced situation, by directly and effectively taking over the powers of the Commissioner under section 177 as perhaps this predatory attitude is a bold attempt to usurp the powers available section 177 which are in fact entrusted to the Commissioner by statute, to be exercised without any influence or coercion. 13. In the present bunch of cases the notices impugned by the petitioners though seem to have been issued under section 177(1) of Ordinance 2001 but in fact have been issued pursuant to sectoral audit selection letters issued by FBR to the Commissioner . The letters which followed the main letter of sectoral audit, then contain detailed directions to its officers and set out strict timeline for selection and completion of audit of the sectors which include refineries, oil marketing companies, manufacturer/importer of electronic goods, automobiles, oil Et Ghee, beverage and cement etc. The timeline provided specific dates by which: (i) taxpayers must be selected for audit; (ii) audit reports must be issued; (iii) show-cause notices must be issued; (iv) assessment orders be passed and (v) final report provided to the FBR. The audit notices were issued to the petitio ners for multiple tax periods in accordance with this timeline. 14. The separation of powers of the Comm issioner and the FBR has been codified through explanation provided to section 177. The explanation is read as under:- Explanation.-- For the removal of doubt, it is declared that the powers of the Com missioner 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." 15. Although substantially it clarifies further that 214C does not in any manner restricts the powers of Commissioner to call for record, but it has to be its own independent call and not under coercion of Section 214C of Ordinance 2001. Under section 214C the FBR selects numerous taxpayers for an audit each year in accordance with its audit policy which process ensures that taxpayers are generally complying with the law whereas audit
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under section 177 served a different purpose which is to examine veracity of a specific taxpayer's return based on commissioner's logical and mindful reasons. 16. In the Pfizer's case this Court discussed purpose of granting the Commissioner powers under section 177 for selecting a person for audit. Paragraph 6 of the judgment provides as under:- "6. The power to impose tax vests in the State. A taxpayer is accountable to the State for his incomes so that the leviable tax can be collected. State has every right to ensure that tax is properly calculated and paid. This obligation of a person to pay correct amount of tax means that a vested right has accrued to the State to examine the account books of a taxpayer . Audit of accounts is the most effective mode of determining the correct liability of tax. Right to conduct audit being absolute, it is hard to imagine that such a right could be left mainly to chance i.e. computer balloting or as and when the Board decides. The power of the Board to choose persons for audit is a general power which is in addition to the power of the Commissioner under Section 120(1A). How then could we hold that when the Commissioner wants to select a specific person to conduct audit, he does not have the discretion to do so under any provision of the Income Tax Ordinance, 2001. If the Commissioner is unable to select a person to conduct audit under Section 120(1A) then there would be no other provision in the Income Tax Ordinance, 2001, which would facilitate the taxing authority to examine a tax return and if circumstances suggest conduct person-specific audit. If we accep t the interpretation of petitioner's counsel then a person-specific audit can never be possible even though a tax return may be required by the taxing authority to be scrutinized in detail. It may be true that frequent audit of the same person at times become a nuisanc e for him but to make such an effective tool to determine correct income inoperative just because Section 214C exists cannot be accepted. The Commissioner then would never be able to select a particular person for conducting audit though circumstances may exist where such a decision has to be taken. This can never be the intention of the legislature. Such an interpretation of Section 214C would make the provisions of Section 120(1A) utterly redundant. In this regard, following example can be quoted with considerable advantage. Example: Mr. X, a businessman is thought by the tax authorities to be involved in tax evasion. The Commissioner serves notice on him. Mr. X takes the stand that he is running his business at a loss which claim is not accepted. The Commissioner needs to audit his accounts in order to ascertain true income of Mr. X's business. If the Commissioner had to depend on the computer balloting or on the decision of the Board under Section 214C to conduct audit and does not have discretion of his own under any provision of Income Tax Ordinance, 2001 to select a person for audit then Mr. X's. account may never come under scrutiny . If the power to conduct audit under . Section 177 is made contingen t upon only on Board's decision exercised under Section 214C then it means that Mr. X can lawfully deny audit of his account books unless his name appears in the selection made by the Board. Such an interpretation of Sections 120(1A) and 214C would lead to disastrous consequences. No provision of Income Tax Ordinance, 2001 suggests that the power to select a person for audit, only vests with the Boar d of Revenue. Thus after examining the provisions of Sections 120(1A), 122(5), 177 and 214C of the Income Tax Ordinance, 2001, it clearly appears that the law visualizes two distinct situations for conducting audit. The first is provided under Section 120(1A) which, in our view, is based on exercise of discretion on the part of the Commissio ner and the other is the power of the Board to select persons or class of persons under Section 214C. We are therefore of the view that by invoking Section 120(1A) any person can be called upon by the Commissioner in his discretion to submit accounts for audit if reasonable grounds exist for doing so. Hence no case for interference under Article 199 is made out." 17. The example set out by this Court in the aforesaid case establishes that the purpose of Section 177 is something more than simply ensuring general compliance of the law by taxpayers and further empowers checking the veracity of returns where Commissioner believes that the return has not been properly filed or to check the instances of tax evasion and tax fraud. 18. The purposive approach to express the intent of legislature while explaining Section 177 and 214C of Ordinance 2001 should not be left eroded as has been discussed in the cases of Dr. Tariq Iqbal , Saif-ur- Rehman , Muhammad Nawaz Chandio , Dilawar Hussain , Director General FIA . 19. The purposive interpretation of Section 177 requires the commissioner to apply his mind to each taxpayer 's individual case. If he decides to select a taxpayer for audit he must give mindful, legitimate reasons that arises out8 9 10 11 12 13
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from the record. If there is no independent application of mind in giving reasons to select a taxpayer for an audit under section 177 then the purpose of section 177 is not achieved and it could not be said to be an exercise undertaken by the Commissioner under section 177. Transparency must be ensured by Commissioner . The authorities were vested with the powers to exercise their discretions and it/they should act in a way that the structured discretion should be seen to have been done in a transparent and fair manner to avoid abuse of process as discussed in the case of W ateen Telecom . 20. We do not agree with the contention of Mr. Metlo, relying on Indus Sugar and PPL (Supra) cases that even irrelevant and illogical reasoning for callin g record to conduct audit would serve the purpose and those illogical and irrelevant reasons would count towards the requirement of Section 177 to provide reasons. If that principle is taken to be correct then it would conclude the expression of providing reasons as utterly redundant, which is perhaps not the intent of the legislature. It would give a room to such officers to conduct roving and fishing expedition which has always been ruled out in dispensation of justice. Reasons should have arisen out of the subject however these reasons, at the same time, does not mean to be of taxpayer's liking but should make a reference to the context by logic. Section 177 empowers commissioner to call record for conducting audit and First proviso to it cuts it in a way that reasons are inevitable to be followed by audit. Second Proviso further strengthened the stand that it must be communicated to the taxpayer . If that is the standing of reasons then its value cannot be diluted by saying that it carries no weight even if illogical and senseless reasons are provided. In the case of Cellandgene Pharmaceuticals which is co-authored by the author of PPL, Bench observed that where notice under section 177 provides sufficient reasoning for selecting a case for audit, the law then does not provide for any alternate course for taxpayer . This interpretation would also supports the above understanding of reasons to be provided by Commissioner under section 177 of Ordinance 2001. Our understanding of Section 177 is also supported by Allah Din's case in Para 16 where emphasis on furnishin g reasons was made and that it must be communicated to taxpayer . 21. Thus, under section 177 of the Ordinance 2001 the Commissioner himself must apply his mind to a specific taxpayer's return and if he decides to audit the taxpayer he must give reasons for his decision. Such reasons must be legitimate and mindful queries that must challenge the taxpayer's returns as framed and filed. A Commissioner is always expected to give mindful reason and if illogical reasons are considered as sufficient then perhaps there is no wisdom in submitting reasons at all. It could only be an eyewash and would lack transparency . By providing prior reasons before audit legislature has provided transparency in the process. 22. The judicial review of such actions being unreasoned, illogical and unjustifiable is an inevitable requirement of law. To judicially review such actions, the Courts must be able to scrutinize the reasons based on which the authority has acted. It appears that the respondents are, in essence, seeking to shield themselves from any form of judicial review of the reasoning to be assigned by the Commissioner while acting in terms of Section 177 of the Ordinance 2001. If such actions are covered as being arbitrary , mala fide and discriminatory , it is amenable to scrutiny . 23. Coming to the point under consideration, since there is no independent application of mind in giving reasons for selection of the petitioners, rather it is dependent on the directions of the FBR, it does not demonstrate a transparent exercise of powers by the Commissioner under section 177 of Ordinan ce 2001. If the FBR can simply direct the commissioner to select any taxpayer for audit then distinction between Section 177 and 214C would collapse and would make either of the two redundant which principle cannot be applied while interpreting the independent provisions of a Statute . 24. The Commissioner would thus become an instrument of the FBR which may act as a predator of the legislative powers of the Commissioner under section 177 to achieve its desired result. The independence of the commissioner and the independent application of mind would loose its transpare ncy which would be against an independent structured mechanism of Ordinance 2001. 25. The Islamabad High Court in the case of Pakistan Tobacco (Supra) has also struck down audit selection notices issued by the Commissioner under section 177 which were also issued on the basis of directions of the FBR. Paragraph 25 and 27 of the same is reproduced as under:-14 15 16 17 18
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"25. What is clear from the scheme of the Ordinance of 2001, as it now exists, is that FBR has independent power to select taxpayers for audit, which is not contingent upon or correlated with the exercise of audit selection powers by the Commissioner under section 177(1) and vice versa. What FBR cannot do is exercise its powers under sections 206, 213 and 214 of the Ordinance of 2001 in a manner that controls the exercise of discretionary power vested in the Commissioner under section 177(1) of the Ordinance of 2001. Section 206 endows FBR with powers to interpret provisions of the Ordinance and issue circulars for such purpose to provide guidance and directions and such directions are binding on tax authorities. But the power to issue circulars in order to interpret provisions of the Ordinance cannot be employed by FBR to direct the Commissioner to exercise his discretionary authority under section 177(1) to produce certain consequences in relation to individual taxpayers as deemed desirable by the FBR. Likewise, FBR can also not exercise its authority under sections 213 and 214 of the Ordinance of 2001, under the garb of providing guidance, by issuing directions to Commissioners for purposes of section 177(1) in such manner that it controls or fetters the discretionary audit selection authority vested in the Commissioner under section 177(1). It is settled law that when the legislature vests in a public authorit y the discretion to reach certain decision, it is for such authority to exercise the power vested by law on the basis of relevant considerations and not for any other authority to usurp such power or control the outcome of such discr etionary authority . It is a settled principle of administrative law that discretion vested in an authority by law cannot be fettered and that the discretion is to be exercised by the authority it is vested in, in a just, fair and reasonable manner , and that the exercise of discretion for extraneous considerations amounts to unlawful exercise of such authority . In view of the provisions of the Ordinance of 2001, FBR is vested with no authority or jurisdiction under section 206 to control the discretion vested in the Commissioner under section 177(1) of the Ordinance of 2001. 27. The issuance of a circular by FBR in exercise of its authority under section 206, as has admittedly been done in relation to Oil Marketing Companies by letter dated 10.03.2021, by directing the W.P No. 272/2021 Page / 37 Commissioner to initiate audit of oil marketing companies in exercise of Commissioner 's power under section 177(1) is a breach of the provision of the Ordinance of 2001. The FBR would have been within its right to exercise its powers under section 214C in the manner provided therein. But to the extent that it could not exercise its powers under 214C in a subjective manner identifying certain sectors within which taxpay ers were to be audited, it could not force the Commissioners to exercise their independent audit selection powers under section 177(1) to achieve such end. It is a settled principle of law that what cannot be done directly canno t be done indirectly either . The exercise of authority by the Commissioner in such manner is also in breach of the scheme of audit as enumerated above. It has already been explained that the purpose for which audit powers have been vested in the FBR is different from the purpose for which such powers have been vested in the Commissioner under section 177(1). The FBR could exercise its audit powers on an objective basis under Section 214C in the manner prescribed, but could not force the hand of the Commissioners to exercise their subjective powers under section 177(1) to trigger the audit of taxpayers effectively selected by the…
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