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Petitioner: Wazir Ali Industries Ltd VS Respondent: Federation of Pakistan and others
Court Name: Sindh High Court Judge(s): Muhammad Shafi Siddiqui, Agha Faisal Title: Wazir Ali Industries Ltd vs Federation of Pakistan and others Case No.:C.P. No.D-4729 of 2021 along with 89 others petitions and three High Court
JUDGMENT
Date of Judgment:2021-12-20 Reported As: 2023 PTD 576, 2022 PCTLR 1745 Result: Petitions allowed Judgment JUDGMENT MUHAMMAD SHAFI SIDDIQUI, J. This bunch of petitions and High Court Appeals involve interpretation of Section 25 of Sales Tax Act, 1990 along with correlative provisions of Federal Excise Act, 2005, such as sections 45 and 46. Petitions raises some of the fundamental questions such as: (i) Whether the Commissioner is required to provide reasons for selecting a person for an audit under section 25 of Sales Tax Act, 1990? (ii) Whether the Commissioner is required to provide reasons for calling taxpayers record under section 25(1) of Sales Tax Act, 1990 and again when the taxpayer is being selected for audit under section 25(2) of Sales Tax Act, 1990? (iii) Whether Federal Board of Revenue can play an influential and decisive role over Commissioner and its jurisdiction for the selecting a taxpayer or a class/classes of person for audit? (iv) What is the effect of Section 25(2) of Sales Tax Act, 1990 when it was introduced through Finance Act, 2018 and omitted through Finance Act, 2019? (v) Whether a taxpayer can be selected for multiple tax period in one year or only once in a year for any given tax period? Likewise almost identical propositions were raised with reference to Federal Excise Act, 2005. 2. We have heard some of the learned counsel representing petitioners and some of the respondents' counsel. Arguments were substantially raised by Mr. Ali Almani, Mr. Ijaz Ahmed, Mr. Hyder Ali Khan and Mr. Ovais Ali Shah for petitioners, which were responded by Mr. Ameer Baksh Metlo, Mr. Shahid All Qureshi and Dr. Shah Nawaz Memon as well as Mr. Kafeel Ahmed Abbasi,
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Deputy Attorney General. Rest of the counsels adopted the arguments for their respective side counsel. 3. Petitioners' counsel contended that it is unanimous conclusion of all Courts including Islamabad High Court, Lahore High Court and of this Court that for selection of a taxpayer for audit under subsections (1) and (2) of Section 25 of Sales Tax Act, 1990, the reasons are inevitable. It is argued that discretionary powers of these authorities must be seen to have been structured which express transparency to avoid abuse of process of law, to curtail possibility of fishing and roving expedition into the affairs of taxpayer to unearth incriminating material. It is further expressed that audit is a disruptive, cumbersome and unbridled exercise of selecting a taxpayer for an audit and absence of transparency would give these officers free rule/hand to drag the taxpayer, which could be biased approach and may end up in harassment. It is argued that the phrase "as and when required" in Section 25(1) inevitably implies that reasons must be provided. It is argued that Section 25 primarily is a two-staged process however interdependent. Counsel are of the view that the aforesaid phrase would serve no purpose at all in case it is rendered meaningless and unless a reasoned order is made for calling the record, the purpose of selection in terms of subsection (2) of Section 25 would not be matured unless an account is made that the discrepancies, as noted at the time of calling the documents, have not been reconciled. 4. Learned counsel for the petitioners argued that view of Dewan Sugar Mills[1] and Pakistan Tobacco[2] in respect of phrase "on the basis of record obtained under subsection (I)" is taken to be correct i.e. applying to the conduct of the audit by the office of Inland Revenue and not to the selection for audit by the Commissioner, it requires rewriting of subsection (2) and bringing this phrase to the beginning of the said provision. It is urged that when a provision of law is clear and unambiguous, Court should give effect to it and not to rewrite it or supply any words. Learned counsel further submitted that since these are two independent provisions, therefore, the independent reasons for both subsections are inevitable. 5. It is argued that Federal Board of Revenue on 10.03.2021 through a letter/notice directed Chief Commissioner Inland Revenue and Large Taxpayers Office (LTO) Karachi, Lahore, Islamabad, Corporate Tax Office (CTO) Islamabad, Karachi and Regional Tax Office (RTO) Sukkur for sectorial audit of Oil Marketing Companies, manufacturers of edible oil, auto industry, manufacturers of aerated water, beverages stating therein that these are sectors which needs to be audited. In consequence whereof Federal Board of Revenue was also pleased to set time line, mechanism for completion of audit under Sales Tax and Income Tax Acts in respect of such sectors as defined above. The time line for completion of audit includes selection for audit, issuance of audit report, issuance of show-cause notice, reply and rebuttal, assessment orders and final report to FBR. In consequence whereof such sectors have received respective notices under section 25 of Sales Tax Act, 1990. 6. Mr. Ameer Bakhsh Metlo, learned counsel for the respondent department has argued in the matters substantially. He submitted that the audit is the most effective tool to assess/evaluate the tax returns under the present regime of sales tax that is based on self-assessment and audit has been established to be a non-adverse action and no exception could be taken in this regard as held by Hon'ble Supreme Court in Allandin's[3] case. He submitted that audit is only a mechanism on the basis of which a probe could be made, which may ultimately be routed through efficacious remedies as far as taxpayers are concerned. Mr. Metlo is of the view that Section 25 of Sales Tax Act, 1990 like sections 45/46 of Federal Excise Act, 2005 is a one-stage process and notices are issued after examination of the returns and hence process of calling record and audit could be done simultaneously as held in the case of Dewan Sugar. 7. Insofar as the conduct of audit once in a year is concerned, Mr. Metlo is of the view that petitioners were selected for audit after omission of the proviso by the Finance Act, 2019 and no
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rights could be attributed to this procedural amendment. He further added that phrase "once in a year" does not mean that by a single notice taxpayer cannot be selected for more than one year as it would be for different tax years i.e. its limitation is for "a tax year" and only once. 8. Mr. Abbasi, learned Deputy Attorney General has substantially argued that provisions of subsection (1) of Section 25 are discretionary in nature and once discretion is exercised for calling record, no mala fide could be attributed, however, reasons could be provided while selecting taxpayer for audit which is one-stage process being cumulative effect of both. 9. We have heard the learned counsel and perused material available on record. 10. In order to understand the controversy for the sake of convenience, relevant portions of some of such notices, as received by petitioners, are reproduced hereunder to understand the points required while interpreting Section 25(1) and (2) of Sales Tax Act, 1990 and sections 45 and 46 of Federal Excise Act, 2005:- Petroleum Companies -- C.P. No. D-2234 of 2021 Annexure A-1 "No.C1R/Audit-111/LT0/2021/ Dated: 12.03.2021 The Principal Officer, M/s Byco Petroleum Pakistan Ltd, 9th Floor, Block-4, The Harbour Front, Dolmen City, HC-3, Marine Drive, Clifton, Karachi. Sub: AUDIT UNDER SECTION-25 OF THE SALES TAX ACT, 1990 FOR THE PERIOD FROM 01.07.2017 TO 30.06.2018 -- INTIMATION. Please refer to the subject cited above. 2. Your case has been examined and found fit to be proceeded of section 25 of Sales Tax Act, 1990 for the subject period. Therefore, in exercise of powers conferred upon me under section 25 of the Sales Tax Act, 1990, you are hereby called upon to produce all books of accounts and other relevant record. The concerned officer of Inland Revenue shall soon be in correspondence with you in this connection. (QAZI HIFZ UR REHMAN) Commissioner Inland Revenue Annexure A-2 "No.CIR/Audit-111/LT0/2021/ Dated: 12.03.2021 To, Deputy Commissioner Inland Revenue, Unit-8 Audit-HI, LTO, Karachi. Sub: AUDIT UNDER SECTION-25 OF THE SALES TAX ACT, 1990 IN THE CASE OF MIS. BYCO PETROLEUM PAKISTAN LTD. FOR THE PERIOD FROM 01.07.2017 TO 30.06.2018. In exercise of the powers conferred upon me by Section 25 of Sales Tax Act, 1990, the sales tax audit of above registered person has been proceeded for the subject period vide letter dated 12.03.2021 (copy enclosed). You are being authorized to conduct the audit. Accordingly, you are directed to proceed and finalize the same as per the provision of Sales Tax Act, 1990 and procedures: (QAZI HIFZ UR REHMAN) Commissioner Inland Revenue Copy to:- 1. The Principal Officer, M/s BYCO PETROLEUM PAKISTAN LTD., Karachi. 2. The Additional Commissioner Inland Revenue, Range-D, Audit-III, LTO, Karachi.
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(QAZI HAFIZ UR REHMAN) Commissioner Inland Revenue Edible Oil -- C.P. No.D-4733 of 2021 Annexure "A" No.CIR/Audit-II/MTO-11/Khi/2020-21/38 Dated: 29.06.2021 1. ... 2. ... 3. ... In exercise of powers conferred upon me by virtue of section 46 of Federal Excise Act, 2005, you are therefore, called upon to submit the record maintained under the Federal Excise Act, 2005, including Books of Accounts for the subject tax period, so that the audit of your FED affairs may be processed in accordance with law. The concerned Deputy Commissioner-1R, holding jurisdiction of your case will communicate with you under the provisions of the Federal Excise Act, 2005, accordingly. You are requested to extend your cooperation with regard to submission of required information/record promptly. It is also assured and reiterated that the audit proceedings would be closed if your FED affairs are found in order." Annexure A-1 No.CIR/Audit-11/MTO-11/Khi/2020-21/37 Dated: 29.06.2021 ..... Through instant correspondence ... 1. ... 2. ... 3. ... 4. ... 5. ... 6. ... In exercise of powers conferred upon me by virtue of section 25 of Sales Tax Act, 1990, you are therefore, called upon to submit the record maintained under Sales Tax Act, 1990, including Books of Accounts for the subject tax period, so that the audit of your sales tax affairs may be processed in accordance with law. The concerned Deputy Commissioner-IR, holding jurisdiction of your case will communicate with you under the provisions of the Sales' Tax Act, 1990, accordingly. You are requested to extend your cooperation with regard to submission of required information/record promptly. It is also assured and reiterated that the audit proceedings would be closed if your sales tax affairs are found in order." Beverage -- C.P. No. D-4403 of 2021 Annexure 'A' No.AUDIT-25/TY-2020/AUDIT-11/LTO/2021 Dated: 28.05.2021 2. On the basis of following risk areas identified during scrutiny of the sales tax returns filed by you and in exercise of powers conferred under section 25 of the Sales Tax Act, 1990 and section 46 of the Federal Excise Act, 2005, your case is selected for audit for the tax period Jul-2019 to Jun-2020. Accordingly, you are called upon to provide all books of account and other relevant record to the Deputy Commissioner Inland Revenue, Audit Unit-06, Audit-II, Large Taxpayer's Office, Karachi, who has been directed to conduct audit in the light of relevant provisions of the Sales Tax Act, 1990. Risk areas are given hereunder:... Automobiles - C.P. No.D-3754 of 2021
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Annexure A-1 C.No.Jud-1/CIR/Audit-1/MT0/2021/ Dated: 04.06.2021 Subject: Selection of audit under section 25 of the Sales Tax Act, 1990 for the tax periods from July- 2019 to June-2020 Thank you for filing sales tax returns for the tax period July, 2019 to June, 2020. 2. The case record has been examined and your sales tax affairs are found fit to be audited for sales tax affairs under section 25 of the Sales Tax Act, 1990. The grounds and reasons/ risk areas for audit, inter-alia are set out as under:- (A) You have also been engaged in import of CBU units and paid value addition tax Q 3% at import stage. It is required to be checked by way of audit whether correct value addition on supply of CBU (Finished goods) is being shown by you. (B) It is required to be checked through the audit whether or not you are paying the Federal Excise Duty as required under section 3 of Federal Excise Act, 2005 read with serial 55, 55A, 55B, 55C, 55D and 56 of First Schedule Table 1 of Federal Excise Act, 2005. (C) The OEMs show vehicle ex-factory price, freight, insurance, WHT at invoice separately. It needs to be ascertained whether values of Supply for sales tax purposes is being calculated properly or not. (D) .... 4. Therefore, in exercise of powers conferred in me under section 25 of Sales Tax Act, 1990 you are hereby called upon to produce all books of accounts and other relevant record. The concerned officer. Inland Revenue shall soon be contacting you inwriting in this connection. It is expected that you will cooperate with the Officer Inland Revenue during the audit proceedings." 11. The issues under consideration came up before different Benches of different High Courts. The first judgment that was delivered in the recent past is of PTCL[4]. It concludes that the use of phrase "as and when required in subsection 25(1) necessarily implied that Commissioner must provide reasons for selecting a person for audit. However, the judgment did not discuss whether after providing reasons under section 25(1) the Commissioner is further required to provide reasons for selecting a taxpayer for audit under section 25(2), however in PTCL case the Bench was of the view that opportunity of hearing the taxpayer be provided and a reasoned order be passed for selecting it for an audit. 12. The second judgment that interprets provision of Section 25 is of Indus Motors[5] wherein learned Single Judge of this Court while exercising jurisdiction on the original side held that section 25 is a two-stage process. In the first step the Commissioner is required to call for taxpayer's record within the frame of Section 25(1). though reasons are not required. In the second stage Commissioner must provide reasons for selecting the taxpayer. The conclusion that the reasons are required in the second stage while selecting a taxpayer for audit, was based on the phrase "on the basis of record" in subsection (2). Learned Judge however disagreed with the conclusion of the PTCL judgment to the extent that use of phrase "as and when required" in subsection (1) of Section 25 necessarily implies that reasons must be provided. 13. The third judgment is again of a learned Single Judge of this Court while exercising jurisdiction on the Original Side in the case of Deewan Sugar v. Federation of Pakistan in Suit No.850 of 2020 (unreported till date). Learned Single Judge in the case agreed with the conclusion of Indus Motor judgment to the extent that reasons must be provided by the Commissioner for selecting a taxpayer for an audit but disagreed with the judgment to the extent that the selection for an audit under section 25 was a two-stage process in which reasons must be provided for the purpose of subsection (2) but not subsection (1). Learned Single Judge was of the view that selection for audit under section 25 is single stage process and the Commissioner can call for record under section
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25(1) and select a taxpayer under section 25(2) simultaneously. Learned Single Judge however left it open as to whether reasons be provided on first notice summoning the record for audit under subsection (1) of section 25 and/or the subsequent notice selecting the taxpayer for audit under subsection (2) of Section 25. 14. The fourth judgment is of Lahore High Court in the case of Hyundai Nishat Motors[6] (unreported) wherein learned Judge agreed with the Indus Motors judgment to the extent that Section 25 envisaged the two-stage process i.e. Commissioner in the first step may call for record under subsection (1) and only after reviewing record, the taxpayer could be selected for an audit under subsection (2). Learned Judge however disagreed with the Indus Motors judgment to the extent that Commissioner was not required to provide reasons when calling for record under subsection (1) of Section 25. In substance learned Judge held that Commissioner must provide reasons for calling for record under subsection (1) but is not required to provide reasons when selecting a person for audit under subsection (2) of Section 25. 15. The conclusion in the case of Hyundai Nishat Motors (Pvt.) Limited is that its ratio is not in agreement with Deewan Sugar judgment that the powers under subsections (1) and (2) of Section 25 could be exercised simultaneously. Since in the Hyundai judgment the impugned notices contained reasons for selecting taxpayer for audit, the Court held that the notices be treated as having been issued under subsection (1) of Section 25 i.e. calling the taxpayer for the record to be submitted and not for selection for audit. 16. The last judgment on the issue is passed by learned Single Judge of Islamabad High Court in the case of Pakistan Tobacco Co. Ltd. in a Writ Petition bearing No.272 of 2021 (Pakistan Tobacco judgment). The learned Single Judge in this judgment agreed with Deewan Sugar judgment and held that the selection for an audit is one-stage process and the powers under subsections (1) and (2) can be exercised simultaneously. Learned Single Judge in Pakistan Tobacco judgment further held that once reasons are provided under subsection (1) at the time of calling record, no reasons have to be provided when exercising powers under subsection (2). Finally learned Single Judge held that PTCL judgment to the extent it concluded that Commissioner must provide an opportunity of hearing before selecting a taxpayer for audit, was limited to specific facts of the case. 17. Petitioners of this jurisdiction have again urged to interpret Section 25 of Sales Tax Act, 1990 along with similar provisions of Federal Excise Act, 2005, as to whether reasons are inevitable-either for calling record in terms of subsection (1) of Section 25 of Sales Tax Act, 1990 or for selecting the taxpayer for audit under subsection (2) of Section 25 of the Act or both. 18. Summary of the discussion of all above five judgments is that in either form whether it be deemed to be a single stage or double stage, reasons are inevitable for audit. The discretionary authority, as settled is structured with this dispensation and it must be transparent and fair, as discussed in the case of Wateen Telecom[7]. It further restricts fishing and roving expedition of the officers concerned to unearth incriminating materials, as stated in the case of Assistant Director (I&I) v. B.R. Herman[8]. 19. Department's counsel Mr. Metlo made two primary submissions on these issues: (i) While reasons are required for selecting a taxpayer for an audit, there is no requirement under Section 25 to disclose those reasons to the taxpayer. (ii) An audit under Section 25 is a one stage process. Requiring the Commissioner to provide reasons for calling for the record under subsection (1) and then for selecting a person for an audit under subsection (2) would place too onerous a burden on the Commissioner. 20. For reaching a fair conclusion with respect to Section 25 of Sales Tax Act, 1900 and 45/46 of Federal Excise Act, 2005, we have made an attempt to minutely go through the scheme of
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respective laws. Let us first deal with Section 25. of Sales Tax Act, 1990 as the effect on later could be similar. 21. Originally when Section 25 was introduced in Sales Tax Act, 1990 it carried the phrase "as and when required" but it is just a solitary provision which is as under:- "25. Access to records, documents etc. --A registered person shall, as and when required by an officer of sales tax, produce records which are in his possession or control as may be required by such officer." It was amended in 1996 and acquired the following structure:- "25. Access to record, documents, etc. --A person who is required to maintain any record or documents under this Act shall, as and when required by an officer of sales tax, 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 such officer of Sales Tax and use of any machine on which such data is kept." 22. Although a minor amendment was carried out in the year 1999, a substantive change was brought in the year 2003 and then undergone many consequential amendments in the year 2005, 2008, 2010, 2013, 2015, 2018, 2019 and 2020. For the purpose of present controversy, the amended provisions which came in the years 2003 is effective. It is this amendment when for the first time subsection (2) to section 25 was introduced in terms whereof officer of the sales tax, on the basis of record obtained under subsection (1) may once in a year required to conduct audit. Section 25, as amended in 2003, is reproduced as under:- "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 an officer of sales tax, 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 such officer of Sales Tax and use of any machine on which such data is kept." (2) The office of Sales Tax, on the basis of the record, obtained under subsection (1), may, once in a year conduct audit: Provided that in case the Collector has information or sufficient evidence showing that such registered person is involved in tax fraud or evasion of tax, he may authorize an officer of sales tax, not below the rank of Assistant Collector, to conduct an inquiry or investigation under section 38." 23. In 2010 the basic structure of Section 25(1) and (2) again reframed when Commissioner was empowered to call record and an officer of Inland Revenue may then was required to be authorized for the purpose of audit. The same, as amended for 2010, is as under:- "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 Inland Revenue authorized by the Commissioner and use of any machine on which such data is kept. (2) The office of Inland Revenue authorized by the Commissioner, on the basis of the record, obtained under subsection (1), may, once in a year conduct audit: Provided that in case the Commissioner has information or sufficient evidence showing 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 subsection shall bar the sales tax officer from conducting audit of the records of the registered person if the same were earlier audited by the office of the
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Auditor-General of Pakistan." 24. In 2018 third proviso was added for conducting audit once in every three years, which additional proviso is reproduced as under:- "25. ... Provided also that audit under this section shall be conducted only once in every three years. (3) ..." The above proviso however was again deleted in 2019's Finance Act. 25. Since 2010, Commissioner entrusted with the mandate of calling 'he record as and when required. Now one thing is for sure that this "as and when required" is not meaningless as being consistently followed and maintained throughout. We now need to understand what could be the event or stage when this phrase may come into play and be given some meaning. Eventually when a Commissioner examines the return of a tax payer, he may have some queries which might be tempting to call record as he may not be able to reconcile and/or resolve them through return statement. Those queries must be understood and settled to the satisfaction of the commissioner before he could make up his mind further. Now the audit is nowhere in the scheme when such questions came for consideration after going through the returns while the Commissioner acts under 25(1) of Sales Tax Act, 1990. Surely the record may…
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