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Petitioner: M/s. Pakistan Tobacco Company Limited VS Respondent: Federation of Pakistan through JUDGMENT
Court Name: Islamabad High Court Judge(s): Babar Sattar Title:M/s. Pakistan Tobacco Company Limited vs Federation of Pakistan through
JUDGMENT
Reported As: PTCL 2022 CL. 202, 2022 PTD 1574 Result:Writ Petitions No. 1499 to 1507, 1600, 1601, 1603, 1604, 1605 and 1606 of 2021 are allowed and remai Judgment JUDGMENT : MR. JUSTICE BABAR SATTAR.--(1). This judgment shall decide the instant petition, as well as petitions listed in the Schedule attached hereto, that impugn notices for purposes of audit under section 177(1) of the Income Tax Ordinance, 2001, section 25 of the Sales Tax Act, 1990 and section 46 of the Federal Excise Act, 2005, on the ground that such notices have been issued without lawful authority and in breach of provisions of the law . 2. The fundamental question involved in these petitions relates to the statutor y prerequisites for exercise of authority by the Commissioner to conduct an audit under section 177(1) of the Income Tax Ordinance, 2001 ("Ordinance of 2001"), and sections 25 and 46 of the Sales Tax Act, 1990 ("Sales Tax Act") and the Federal Excise Act, 2005 ("Federal Excise Act"), respectively . The additional question raised in some of the petitions is whether the Commissioner is vested with authority under section 177(1) of the Ordinance of 2001 to select a taxpayer for audit independent of any selection by the Federal Board of Revenue (FBR) under section 214C of the Ordinance of 2001, even though it was conceded that the said question has been decided by a larger bench of this Court in Pakistan Telecommunication Company Ltd. Vs. Federation of Pakistan (PTCL 2016 CL. 302). A further question that arises in view of the arguments made on behalf of FBR is whether the petitions are maintainable in view of the fact that selection for audit does not cause an actionable injury . 3. Let us start by summarizing the arguments of the learned counsels for the parties followed by review of the scheme of the statutes in question as well as judicial pronouncements enumerating the scheme of such statutes, followed by the opinion of this Court. 4. Mr. Hyder Ali Khan, learned counsel for the petitioners in Writ Petitions No. 1499 to 1507 and 1600 to 1606 of 2021 took the Court through the case law in relation to audit over various time-periods in view of amendments
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introduced within the Ordinance of 2001. His basic contention was that by circulars dated 01.03.2021 and 10.03.2021 FBR instructed Commission ers to audit oil marketing companies and prescribed timelines for the purpose of selection for audit, generati on of audit reports, issuance of show cause notices and subsequent assessment orders. He submitted that such directive issued by the FBR was binding on the Commissioner , which fettered the discretion vested in the Commissioner to exercise his authority under section 177(1) of the Ordinance of 2001, independent of the FBR, and the initiation of an audit on the basis of such illegal directive was unlawful and based on an extraneous consideration. He submitted that FBR was vested with the authority under section 214C of the Ordinance of 2001 to select a person for audit in compliance with requirements of such section, and such audit could be random or parametric. But that FBR had not undertaken such exercise and instead issued directions to Commissioners in order to force the exercise of discretion by the Commissioners under section 177(1) of the Ordinance of 2001 in an unlawful manner . Mr. Hyder Ali Khan further submitt ed that a taxpayer has a right to be treated in accordance with law and to the extent that the power under section 177(1) was exercised in a manner in breach of statutory prerequisites, the consequent selection for audit in exercise of such power was unlawful and liable to be set aside. He submitted that exercise of authority by the Commissioner under section 177(1) of the Ordinance of 2001 on the basis of a directive issued by FBR suffered from mala fide in law and was amenable to the jurisdiction of this Court. He submitted that a sectoral audit letter instructing Commissioners to audit taxpayers falling within such sector was motivated by FBR's desire to meet certain revenue targets, which amounted to ordering an audit for a collateral propose. He further submitted that exercise of authority under section 25(1) of the Sales Tax Act, 1990, selecting the petitioner for a sales tax audit and under section 46 of the Federal Excise Tax Act, 2005, also suffered from infirmity as such audit was based on an illegal directive issued by the FBR. He submitted that Sales Tax Act, 1990, did not make any allowance for a composite audit. He further contended that section 25(1) & 25(2) of the Sales Tax Act provide for a two step-process for selection of audit. That step one was the issuance of notice together with reasons seeking the record of the taxpayer . And at step two a taxpayer could be selected for audit based on application of mind by the Commissioner on the basis of scrutiny of the record procured under section 25(1). He submi tted that section 25 of the Sales Tax Act did not conceive issuance of notices simultaneously for selection of audit as well as provision of record. 5. Sirdar Ahmed Jamal Sukhera, Advocate for petitioners in Writ Petitions No. 1265 to 1269 and 2237 of 2021 submitted that reasons in the impugned notices fell short of the required standard of the issuance of notices and the absence of reasons that could be deemed reasonable constituted a jurisdictional defect amenable to the writ jurisdiction of this Court. He submitted that in accordance with the judgment of this Court in Pakistan Telecommunication Company Ltd. Vs. Federation of Pakistan (PTCL 2016 CL. 302) the Commissioner was under an obligation to formulate criteria prior to exercise of powers under section 177(1) of the Ordinance of 2001, which had not been done in the instant case. That power of selection for audit could not be left to the whims of the Commissioner and his unguided discretion and the impugned audit notices were liable to be set aside as neither any pre-determined criteria had been specified by the Commissioner nor had reasons been recorded that satisfied the reasonability test. He submitted that any show cause notice, issued on the basis of an audit report that was a product of audit notices that suffered from legal infirmity , was also not sustainable in the eyes of law and was liable to be set aside. He submitted that there was a remedy provided under section 7 of the Federal Board of Revenue Act, 2007 ("FBR Act"), but such remedy was illusory . And even otherwise it was settled law that if any order suffered from jurisdictional defect, an aggrieved person could seek relief from the High Court against wrongful assumption of jurisdiction by a public authority . 6. Hafiz Muhammad Idrees, ASC for petitioners in W.P No. 1052, 1373, 1374, 1391, 1392, 1393 1394 and 2364 of 2021 submitted that the Commissioner had no independent authority to select taxpayers for audit under section 177 of the Ordinance of 2001 and that the selection had to be made by FBR under section 214C of the Ordinance of 2001 after which it was for the Commissioner to undertake the audit pursuant to provisions of section 177 of the Ordinance of 2001. He submitted that this Court in Pakistan Telecommunication Company Ltd. had not agreed with the contention of the petitioner that section 177(1) was to be read together with section 214C of the Ordinance of 2001 and cross appeals had filed against the said judgment by taxpayers and the FBR, which were pending
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adjudication before the august Supreme Court. His contention was that the petitioners have not been selected for audit under section 214C of the Ordinance of 2001 and consequently notices intimating selection of petitioners for audit under section 177(1) were without jurisdiction. His second submission was that even if the law as laid down by this Court in Pakistan Telecommunication Company Ltd. were to be followed, the Commissioner was obliged under section 177(1) of the Ordinance of 2001 to record reasons for selection of a taxpayer for audit and communicate the same to the taxpayer and then afford the taxpayer an opportunity to be heard and to raise objections against the selection, which had not been done in the instant case and consequently the audit proceedings were in breach of the petitioners' right to be heard prior to initiation of audit under section 177(1) read together with Article 10A of the Constitution. He further submitted that the Commissioner was under a statutory obligation to undertake audit selection on the basis of predetermined criteria and the reasons for selection had to meet the test of reasonability , and as the said requirements had not been met in the instant case, the audit notices suffered from jurisdictional defect. He submitted in relation to audit notices issued under sections 25 and 46 of the Sales Tax Act and Federal Excise Act, respectively , that the Commissioner was obliged to give reasons for selection of audit and such reasons could not be arbitrary . And that in the case of the petitioners, they had been simultaneously selected for audit for four consecutive years and such selection was arbitrary . He submitted that the selection of the petitioners for audit for consecutive years was not supported by any reason and it appeared that the petitioners had been selected for audit for all years within the limitation period, and therefore such selection was discriminatory and mala fide and not backed by legitimate reasons. 7. Ch. Naeem ul Haq, Advocate for petitioners in Writ Petitions No. 1590, 1591, 1592, 1593, 1631, 1632, 1633, 1672 and 2547 of 2021 adopted the arguments of Hafiz Muhammad Idrees, Advocate. 8. Mr. Hassan Kamran Bashir , Advocate for petitioners in Writ Petition Nos. 272 and 2202 of 2021 submitted that the petitioner's selection for audit under section 25 of the Sales Tax Act and 46 of the Excise Act was a two-step process. That in the first instance the Commissioner was under an obligation to give reasons for summoning record. It was on the basis of review of the record that the Commissioner could then select a taxpayer for audit under section 25(2) of the Sales Tax Act. He submitted that the authority vested in the Commissioner was discretionary in nature and exercise of such discretion had to be structured and the course of action adopted had to be the product of independent application of mind to the facts and circumstances of the case. He submitted that the impugned notices suffered from legal infirmity as they were issued without discharge of mandatory obligations under section 25(1) of summoning record subject to a reasoned order . That the power under section 25(2) of the Sales Tax Act had been used to directly select the petitioners for audit and consequently the Commissioner placed the cart before the horse. He submitted that in the event that the impugned notices were found to be lawful it would render section 25(1) of the Sales Tax Act, 1990 redundant. 9. Mr. Saeed Ahmed Zaidi, Advocate for the respondent/FBR, submitted that the petitions were not maintainable as it had been held by the august Supreme Court in Commissioner of Inland Revenue, Sialkot Vs. Allah Din Steel and Rolling Mills (PTCL 2018 CL. 678) that mere selection for audit did not constitute an actionable injury . He submitted, after adverting to the legislativ e history of audit powers under the Ordinance of 2001, that under section 214C the FBR is vested with an independent power to select a taxpayer for audit and such power had no co- relation with the power vested with the Commissioner under section 177(1) of the Ordinance of 2001. He submitted that under the self-assessment scheme introduced through the Ordinance of 2001, a taxpayer was under an obligation to pay tax and the State had been granted requisite tools in the form of power to conduct audit to ensure that a taxpayer had correctly declared his income. He submitted that section 177 did not conceive of a pre-audit selection adjudicatory process and did not require an opportunity to be provided to a taxpayer to be heard prior to his selection for audit, and that such obligation could not be read into the statute. He submitted that this Court in Pakistan Telecommunication Company Ltd. had not declared that there was an obligation on part of the Commissioner to provide a taxpayer an opportunity to be heard prior to initiating an audit against him and that it was in the peculiar facts and circumstances of the cases being adjudicated that the Commissioner had been directed to hear the objections of taxpayer prior to initiating an audit. He submitted that FBR had given directions to the Commissioners to audit various sectors and such directions were binding on the Commissioners in terms of
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section 206 of the Ordinance of 2001. And that in view of such binding directions, the Commissioners had looked into the facts of each taxpayer's case within the identified sectors and subsequently proceeded in accordance with the requirements of section 177(1). And consequently , the impugned notices suffered from no legal infirmity merely because they were the consequence of directions issued by FBR. He submitted that audit process envisaged three stages. That at the first stage, under section 177(1) of the Ordinance of 2001, a taxpayer was selected for audit and was directed to produce relevant record together with furnishing of reasons by the Commissioner for exercise of such authority to audit a taxpayer . That at the second stage, prior to culmination of the audit, the taxpayer was confronted with concerns that emerge d during the process of the audit and the auditor then gave its findings after seeking explanations from the taxpayer and the audit thus ended with the issuance of an audit report. And that at stage three, in the even that that the audit report reflected that reassessment of the income tax return filed by the taxpayer was called for, an appropriate notice was issued under section 122, wherein the taxpayer was once again provided an opportunity to be heard prior to imposition of additional tax liability . And in view of the aforementioned scheme, a taxpayer could not claim to have suffered an injury merely on the basis of being selected for audit. He submitted that the writ petitions were not maintainable in the event that a fresh demand was generated on the basis of audit report. That the Ordinance of 2001 provided for appropriate statutory remedies. And even otherwise under section 7 of the FBR Act a remedy had been af forded to the petitioners, which had not been availed. 10. Mr. Atif Rahim Burki, Advocate for the respondent submitted written arguments that raised objections to maintainability of the petitions and also reiterated that the impugned notices suffered from no illegality . He submitted that all of the objections raised by the petitioners to the authority of the Commissioner to select a taxpayer for audit under section 177(1), as well as the requirements of law to be satisfied in doing so, had already been addressed by the superior courts and the only question of law before this Court was whether in view of the law laid down by a larger bench of this Court in Pakistan Telecommunication Com pany Ltd. the petitioners had a statutory right to be heard under section 177(1) of the Ordinance of 2001 prior to initiation of an audit. 11. In rebuttal, the learned counsel for the petitioners drew the attention of this Court to the following judgments of the learned Lahore High Court and the learned Sindh High Court: (i) W.P No. 37251/2021 titled Raza Motor Industries Vs. Federation of Pakistan decided on 14.06.2021. (ii) W .P No. 25793/2021 titled Hyundai Nishat Motor Pvt. Limited Vs. FBR decided on14.09.2021. (iii) Suit No. 850/2020 titled Dewan Sugar Mills Vs. Federation of Pakistan decided on 09.08.2021. It was submitted that the learned Sindh High Court as well as the learned Lahore High Court had found that summoning of record for purposes of audit under section 25(1) of the Sales Tax Act was a stage independent of selection for audit under section 25(2) of the Sales Tax Act and notices for both purposes could not be issued simultaneously . And that the Commissioner was under an obligation to record reasons for summoning of record under section 25(1) of the Sales Tax Act. It was further brought to the attention of this Court that in Raza Motor Industries the learned Lahore High Court had found that the two-stage process envisaged under the Sales Tax Act for selection of audit was not applicable under section 177 of the Ordinance of 2001. 12. The history of evolution of audit powers under the Ordinance of 2001 has been dealt with in detail in Messrs Chenone Stores Ltd. v. Federal Board of Revenue (PTCL 2013 CL. 1) as well as Pakistan Telecommunication Company Ltd. Vs. Federation of Pakistan (PTCL 2016 CL. 302) and need not be recapitulated here once again. This Court will address the scheme of the Ordinance of 2001 initially and subsequently deal with the scheme of audit under the Sales Tax Act and the Federal Excise Act. It is by now well settled that the State has a right to tax its citizens and the citizens are under an obligation to pay their fair share of tax liability . The Ordinance of 2001 envisages that the enforcement of such right and obligation will be through a self-assessment scheme, which was a change from the assessment mechanism provided under the Income Tax Ordinance of 1979. Under section 120(1) of the Ordinance of 2001 the return of income filed by a taxpayer is deemed to be an assessment of taxable income by the Commissioner . Section 120(1A) provides that notwithstanding section 120(1), the Commissioner may conduct the audit of the income tax affairs of a taxpayer under section 177 of the Ordinance of 2001. Section 120(1) and 120(1A) reflect that on the one hand the State wishes to repose its trust in the taxpayer and assume that the income declared by such taxpayer will be truthful and
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will thus to be deemed an assessment order . But simultaneously under section 120(1A), the legislature grants the Commissioner the requisite tool to subject a taxpayer's income tax returns to scrutiny . This scheme reflects the legislative intent behind section 177 of the Ordinance of 2001 i.e. to equip the Com missioner with an effective tool to scrutinize the tax affairs of the taxpayer when he has reasonable basis to conclude that the income declared might have been declared erroneously or untruthfully . Section 120(1A) reflects that exercise of power by the Commissioner under section 177(1) is meant to be focused on the return of an individual taxpayer and not for pursuit for any larger goal relevant for purposes of section 214C, as will be discussed later in this judgment. Section 121 provides for the best judgment assessment and amongst the incidences where such judgment is to be exercised includes, inter alia, the failure to produce accounts and records under section 177 of the Ordinance of 2001. Section 122(5) then provides that "an assessment order in respect of tax year, or an assessment year, shall only be amended under subsection (1) and an amended assessment for that year shall only be further amended under subsection (4) where, on the basis of audit or on the basis of definite information." Section 122(5A) further provides for an amendment of assessment order if the assessment order is found to be erroneous and prejudicial to the interest of revenue. In this section the expression "definite information" includes information related to sales or purchases of any goods, receipts from services rendered or otherwise chargeable to tax and information regarding acquisition, possession or disposal of any money or asset, valuable article or investment made or expenditure incurred. Section 177 read with sections 120, 121 and 122 reflects that audit by the Commissioner under section 177 is conceived to be a tool to ensure that a taxpayer filing income tax return provides a truthful account of his income. Section 127 provides, for an appeal to the Commissioner but does not provide an appeal against an order selecting a taxpayer for audit. Section 122(9) provides that in the event that reassessment order is passed it can only be passed after providing the taxpayer an opportunity to be heard. In view of the aforementioned provisions, read together with section 177, the statute does not conceive of an adjudicatory stage prior to initiation of an audit and where an opportunity is to be provided it is specifically mentioned under sections 122(9) as well as 177(6) of the Ordinance of 2001. The timeline provided in the proviso to section 177(1) corresponds to that for maintenance of records under section 174 as well as for passing of an order to amend an assessment under section 122 of the Ordinance of 2001. It is patent that that the object of creating the power to conduct audit under section 177, as the law now stands, is to enable the Commissioner to audit books and accounts of a taxpayer in the event that he has reasonable basis to conclude that the return filed on self-assessment basis does not record the true taxable income of the taxpayer . The object is therefore to empower the Commissioner to undertake diligence in order to pass a reassessment order in relation to an individual taxpaye r should the need arise, and not to pursue any larger goal for purposes of reshaping tax audit policy or carrying out any study regarding the administration and efficiency of the tax regime on the whole. As the Commissioner is repository of the tax record of an individual taxpayer , it has been left to him to determine on the basis of a taxpayer's tax returns whether there is reason to believe that some of the taxable income has not been correctly declared, which calls for audit of his books and accounts. And if reasonable grounds are borne out of such audit proceedings, a reassessment order is to be issued. 13. It has been argued by the learned counsel for the petitioners that in the absence of predetermined criteria, selection of a taxpayer for purposes of audit is without jurisdiction. This Court has not been persuaded by this line of arguments. The erstwhile section 177 provided for selection of taxpayer for audit by the Commissioner as well as by the FBR and consequently section 177(4) dealt with the considerations to be borne in mind by the Commissioner in case of exercise of power by him selecting a taxpayer for audit. But after promulgation of section 214C, the powers of FBR and the Com missioner for purposes of selecting a taxpayer for audit have been separated. Erstwhile section 177(4) has since been deleted by the legislature in its wisdom. Section 177 as it now stands, deals exclusively with the powers of the Commissioner to select a taxpayer for audit. Consequently , there is no reason to confuse the factors to be borne in mind by the FBR when it exercises the powers to select a taxpayer for audit with those to be borne in mind by the Commissioner while exercising his audit selection powers. The focus on the Commissioner prescribing criteria for selection of taxpayers for audit also seems unnecessary in view of the scheme of assessment as enumerated above. Even if one evaluates the factors mentioned in the erstwhile section
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177(4) specifying the matters to be kept in mind by the Commissioner while exerc ising his audit selection powers, they did nothing other than to provide that where the Commissioner has reasonable basis to conclude that the income of a taxpayer has escaped taxation, he may exercise his discretion and chose to subject the books and accounts of such taxpayer to audit. The only requirement for exercise of such authority in view of erstwhile section 177(4), and section 177(1), as it now exists, is that the Commissioner must have reasonable basis for subjecting a taxpayer to audit. In other words, the Commissioner cannot initiate an audit on the basis of a hunch or suspicion or conjecture as held by this Court in Pakistan Telecommunication Company Ltd, as suspicion alone would not constitute reasonable basis to question the veracity of a return (i.e. deemed assessment) under section 120(1A). At the other end of the spectrum is a situation where the Commissioner has definite information that income of a taxpayer has not been subjected to tax. In face of information to the Commissioner need not undertake the exercise of audit and can simply issue a notice for purposes of reassessment in view of section 122(5). Thus, reasonable basis for issuing a notice for selecting a taxpayer for audit would always be something more than mere suspicion and something less than definite information. In other words, reasonable basis would need to be a cogent cause leading the Commissioner to…
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