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Petitioner: Federal Board of Revenue, etc. VS Respondent: M/s. Chenone Stores Limited
Court Name: Lahore High Court Judge(s): Shahid Jamil Khan, Masud Abid Naqvi Title: Federal Board of Revenue, etc. vs M/s. Chenone Stores Limited Case No.: Case No, 855 of 2014 Date of Judgment:2017-11-17 Reported As: 2017 LHC 3661, 2018 PLJ 379, 2018 PTCL CL. 141, 2018 PTD 208, 2018 P.C.T.L.R. 78 Result: ICAs of Department Allowed/ ICAs of Tax Payers Dismissed
JUDGMENT
JUDGMENT SHAHID JAMIL KHAN, J. --- This judgment shall decide two sets of appeals filed respectively against two judgments delivered by different learned Single Benches of this Court. Common question of Commissioner's powers to select for audit, under three Federal Taxing Statutes, is involved. Lists of the appeals, respectively, are annexed as Annexures A & B. Appeals listed in Annex-A are filed by Revenue Department assailing judgment dated 10.05.2012 in Writ Petition No, 393 of 2012, ("Chenone Stores"); whereas, the appeals listed in Annex-B are filed by Taxpayers against judgment dated 27.05.2015 in Writ Petition No, 4691 of 2012 ("Kohinoor Sugar Mills"). 2. Both the judgments are contended to be at variance: In Chenone Stores' judgment notices of selection for audit, issued, after amendments through Finance Act, 2010, by Commissioner under Section 177 of the Income Tax Ordinance, 2001 ("Ordinance of 2001"); Section 25 of the Sales Tax Act, 1990 ("Act of 1990") and Section 46 of the Federal Excise Act, 2005 ("Act of 2005"), were declared illegal and without lawful authority after striking down first proviso to the Section 177(1). The Kohinoor Sugar Mills' judgment had also dealt with validity of notice of selection for audit, issued by Commissioner under Section 177, after amendments through Finance Act, 2010. The Explanations inserted, during proceedings, through Finance Act, 2013, were treated to have retrospective effect, therefore, the selection by Commissioner was held to be in accordance with law. 3. Earlier; Chenone Stores' judgment was assailed directly before Supreme Court of Pakistan through Civil Appeal No, 1032 of 2012 alongwith connected Civil Appeals. The appeals were
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remanded, with consent of the parties, by the august Court to this Court, directing to treat them as appeals against original order and issue notice to the Attorney General under Order XXVII-A, C.P.C. Operative part of the order is reproduced:--- "4. We agree with the learned counsel but at the same time, we are mindful of the objection of non- issuance of notice to the learned Attorney General by the learned High Court could have been taken up as one of the question before the ICA .Bench seized with the matter, which too could have itself issued a notice to the learned Attorney General because after admission of the ICA, the proceedings shall be considered to be in continuation of the proceedings before the learned Single Judge by way of first appeal Striking down the provisions of law, being ultra vires the Constitution, obviously requires examination and interpretation of the provisions of the Constitution with the assistance of the learned Attorney General after due notice in terms of the provisions of Order XXVII-A, Rule 1, C.P.C., therefore, the learned counsel for the appellants as well as the respondents in the appeals noted hereinabove, agree that the instant appeals be sent back to the ICA Bench treating the same, as the appeals against the original order and for decision after issuing notice to the learned Attorney General in order to save the parties from the agony of protracted proceedings and also to ensure that further time is not consumed in the legal proceedings, as the question in the appeals, involves Public Revenue, therefore, the interest of both. the parties would also be protected in this manner." [emphasis supplied] The remanded cases were treated as appeals and notice under Order XXVII-A, C.P.C., as directed, was issued on 26.01.2015. In response to the notice Mr. Imran Aziz Khan, Deputy Attorney General represented the Attorney General's Office. Objections on maintainability of appeals were raised by Mr. M.M. Akram, Advocate, which were turned down, through an independent order dated 29.03.2017, in light of the directions, ibid, by apex Court. 4. Learned counsels for both the parties are heard; Counsels for the Revenue Department have argued in favour of Commissioner's power to select for audit, contending that this power was available since inception of the Ordinance of 2001; remained intact after amendment through Finance Act, 2010 and has so been clarified by the Explanations inserted through Finance Act, 2013. Learned counsels for the taxpayers argued that scheme of law has been changed after amendments through Finance Act 2010, therefore, only Federal Board of Revenue ("FBR") can and Commissioner cannot select for audit. On insertion of Explanations; it is argued first; that these shall not have retrospective effect and secondly that the Explanations have not removed the defects pointed out in Chenone Stores' judgment, therefore, are ineffective. Relevant arguments, point wise, shall be addressed in body of the judgment as and where felt necessary. 5. Heard Record perused. 6. Historic overview of Commissioner's power to select for audit, the controversy, in backdrop of the changes in relevant law is necessary. Every attempt to select and audit the tax affairs, after self- assessm ent, was subjected to litigation since erstwhile Income Tax Ordinance, 1979 ("Repealed Ordinance"). Challenge to selection for total audit, by Regional Commissioner, of returns filed under Self-assessm ent Scheme was laid to rest through judgment in Commissioner of Income Tax and others v. Messrs Media Network and others (2006 PTD 2502); Policy guidelines, issued by the then CBR, after filing of returns under the Self-assessment Scheme, were challenged, contending that the guidelines should have been issued before filing of returns under Self-assessment Scheme. Single Bench of this Court allowed the writ petitions, however, on appeal, the selection was upheld with the findings that the guidelines, being administrative in nature, had not taken away any vested right. Infringement of the principle of natural justice, claimed by taxpayer's side was
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answered by holding that it was not mandatory during the course of preliminary inquiries or investigations. Relevant excerpts are reproduced:--- "22. ... The C.B.R. specifically directed that before making a final selection, the Regional Commissioners of Income Tax must confront the assessees, provide them opportunity of being heard and must indicate the basis of their proposed selection in the notices to be communicated to them. These guidelines were administrative in nature meant for the internal consumption . of the Income Tax functionaries which did not create any rights nor did they impose any obligations. Those instructions had not taken away any vested right of the assessees and would not govern the adjudicatory proceedings of quasi-judicial in nature. However, it could not be said that the guidelines were, in any way, extraneous, irrelevant or unfair to the object to be achieved by the process of selection of cases for total audit. In our view, the procedure of selection of cases for total audit as provided by paragraphs 9 and 10 of the Scheme was not nullified or whittled down by the policy guidelines, dated 17.12.2002." "26. The rules of natural justice are not inflexible. They yield to and change with the exigencies of different' situations. They do not apply in the same manner to situations which are not alike. These rules are not cast in a rigid mould nor can they be put in a legal strait-jacket. They are not immutable but flexible. They can be adopted and modified by the Statutes. The need to act in an emergency may also exclude at least a prior hearing or where a decision affects so many people that a hearing would be impracticable. In some cases there may be collective right, of hearing, or to be consulted although not necessarily a hearing in individual cases. Depending upon the facts and circumstances of each case, there is no mandatory requirement of natural justice that in every case the other side must be given a notice before preliminary steps are taken. It might suffice if reasonable opportunity of hearing is granted to a person before an adverse action or decision is taken against him. However, it is not possible to lay down an absolute rule of universal application governing all situations as to the exclusion or otherwise of the audi alteram partem rule during the course of preliminary inquiries or investigations." [emphasis supplied] 7. The challenge to Commissioner's powers to select and conduct audit under Section 177 of the Ordinance of 2001, was laid initially, when these provisions were invoked for the first time. Relevant part of Section 177, as it stood then, is reproduced for facility of understanding the issue:-- "177. Audit-- (1) The Commissioner may select any person for an audit of the person's income tax affairs having regard to.--- (a) the person's history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter that the Commissioner considers relevant." The selection was challenged before this Court under Constitutional jurisdiction and through judgment in Ch. Muhammad Hussain and others v Commissioner of Income-Tax (2005 PTD 152), it was declared that non-issuance of notice, disclosing reason for selection, wasillegal. The matter went in appeal before the Hon'b!e Supreme Court. The apex Court in Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others (2009 PTD 37) ordered for modification of the judgment in Muhammad Hussain's Case; Learned Attorney General of Pakistan agreed to abide by the directions for issuance of notice by the High Court if findings, that selection for audit was prejudicial to the taxpayer, were expunged. The portion, containing the findings, was deleted and matter was remanded with direction to issue fresh notices disclosing criteria/reasons for selection. Relevant part is reproduced:--- "5. In view of the above arrangement between the parties, the appeals are disposed of with consent, consequently, the portions of impugned judgment reproduced hereinabove are deleted
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with the observation that let appellants issue fresh notices to the respondents in terms of Section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purpose of audit. As far as the cases in respect whereof observations have been made hereinabove relating to Circular C. No, 1(1)S(ITAS)/2004 or otherwise if the returns have been revised and payment has been made by the assessees no further action shall be taken against them. The parties are left to bear their own costs." [emphasis supplied] 8. An amendment was introduced in Section 177 through Finance Act, 2004, whereby CBR (now FBR) was given power to lay down criteria for selection of cases by the Commissioner. Relevant parts of the amended Section are reproduced.-- "177. Audit.-- (1) The Board, may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner. (2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the Board under sub-section (1). (3) The Board shall keep the criteria confidential. (4) In addition to the selection referred to in sub-section (2), the Commissioner may also select a person for an audit of the person's income tax affairs having regard to:--- (a) the person's 'history of compliance or non-compliance with this Ordinance; (b) the amount of tax payable by the person; (c) the class of business conducted by the person; and (d) any other matter which in the opinion of Commissioner is material for determination of correct income." [emphasis supplied] 9. Notices under the amended Section 177, were challenged before this Court; contending again that selection could not have been made without disclosure of criteria for selection before filing of returns. The direction by apex Court in Fatima Sharifs judgment, ibid, i,e,, "let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for, selecting their cases for purpose of audit' was referred in support. Learned Single Bench of this Court through judgment in Messrs Syed Bhais (Pvt.) Ltd. through Director v. Central Board of Revenue, Islamabad through Chairman and another (2007 PTD 239) dismissed the petitions, relying upon the judgment in Media Network's Case, supra, besides referring to the Section 177(3), ibid, to hold that publication of criteria before filing of returns was not mandatory; The amended provisions of Section 177 were declared to have two parts; first, related to selection on the criteria to be laid down by the Board and the second was dealing with selection by Commissioner directly under sub-section (4) of Section 177; The words "in addition to" and "may also", used in this sub-section, were emphasized. It was held that criteria before selection was relevant only if so provided by CBR. It was clarified that in Fatima Sharifs Case direction was for Commissioner to disclose reasons in the notices for selection and not before filing of returns. The impugned notices, after examination, were held to have met the direction by apex Court and requirements under the Section 177(4)(d). Operative part from the judgment is reproduced:--- "14. Now I will revert to objection of the petitioner as to the selection for audit, without laying down objective criteria before filing of returns. As mentioned in the preceding para that Section 177 comprises of two parts and authority of Commissioner to select a case, is separate under each part. In case the C.B.R. has laid down a criteria, then the Commissioner is bound to select the case of that person on the basis of the criteria. Previous publication of criteria/ guidelines in the objective form is not the requirement of law, nor it is justified. Firstly, for the reason that according to provisions of Section 177(3) of the Ordinance, 2001 C.B.R. has to keep the criteria confidential.
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Secondly, as observed by the Hon'ble Supreme Court of Pakistan in the case of Messrs Media Network (Supra) previous publications of criteria/guidelines will be instrument in hands of taxpayers, 'who by knowing beforehand that their cases will not be selected or scrutinized, will take full benefit of the situation. Previous publication of criteria, will fore-arm the taxpayer to evade tax. Issuance of criteria either before or at the time of announcement of scheme would frustrate the very object of provision of section 177(3). Revenue and various respondents, entered into arrangement before the apex Court (in Appeals Nos, 1962 to 2205 of 2005) whereby the appeals were disposed of by consent as a result thereof, Hon'ble Supreme Court, observed that fresh notices in terms of Section 177 of Ordinance, 2001 be issued, disclosing criteria/reasons for selection their cases for the purpose of audit. Revenue is bound to follow the arrangement and slightest departure from the observation/direction of the apex Court cannot be expected. The question whether the impugned notice, in any manner, negates the said arrangement, as the notices were served without laying down a criteria, the answer is obviously a big "No". Disclosure of criteria was only relevant when the cases were selected for audit on the basis of criteria laid down by C.B.R. in terms of Section 177(1) and (2). Since the cases of the petitionerS were selected under section 177(4), therefore, the Commissioner was to disclose reasons that while selecting the cases for audit, due regard was given to the provisions of Section 177(4) (a) to (d). The judgment of the Hon'ble Court (in Civil Appeals Nos, 1962 to 2205 of 2005) requires from the Revenue the disclosure criteria/reasons in the notice. The examination of impugned notices, challenged through these petitions, reveal that reasons for selection were duly conveyed, which are:--- Writ Petition No, 5471 of 2006 Decrease in gross profit from 21.18% to 17.6% Writ Petition No, 5398 of 2006 Decrease in gross profit from 14.64% to 12.49%
Writ Petition No, 5473 of 2006 Decrease in gross profit from 20% to 16.34% Writ Petition No, 5417 of 2006 Receivables/debts were written-off, it was to examine that receivable were irrecoverable. Secondly interest on Rapco was merged in sale of investment examination. Writ Petition No, 6331 of 2006 Gain on shares, interest on share merged in profit on sale of investment. Writ Petition No, 5472 of 2006 Wrongly allocating the profits from local business to presumptive tax regime.
15. The above reasons, disclosed in the impugned notices, sufficiently meet the requirement of Section 177(4)(d). The cases of the petitioners are not selected for audit under Section 177(1) and (2): therefore, disclosing criteria in the impugned notices is not relevant. The issuance of notice for selecting the case of the petitioners for audit does not infringe the arrangement arrived at between the Revenue and various tax-payers. The notices comply with the observation of the Hon'ble Supreme Court of Pakistan. 16. Coming to the objection of petitioners that selecting a person for audit, would unduly put the petitioners to the vigours of audit and process of audit without any benefit to Revenue, will unfairly cause hardship. Further the objections that selection of a case for audit without laying an objective criteria, is discriminatory and capable of arbitrary application, for the reason that it confers unbridled power on Commissioner to pick and choose, was thoroughly examined by
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Hon'ble Supreme Court in Messrs Media Network case (Civil Appeals Nos, 233 to 315 of 2004). The apex Court has held, these objections, not tenable. The selection of case for audit, in view of the afore-mentioned decision of the Hon'ble Supreme Court, is open to exception only when selection involves personal bias; mala fide or suffers from unfair treatment. No element of bias or mala fide either exists or has been pleaded by the petitioners. Additionally, the taxpayer is legally and morally bound to furnish true declaration of income in his/its return. The taxpayer, while filing the return makes a declaration under Section 114(2)(b) to the effect that relevant record alongwith other particulars is kept. A true statement in the return has been made and the record is maintained as per declaration. No prejudice is caused to a taxpayer on being selected for audit, if he makes true statement and maintaining record as per declaration." [emphasis supplied] 10.Subsequent notices of selection for audit, by Commissioner, under the amended Section 177, ibid, were again challenged before this Court and the petitions were decided by two learned Single Benches through judgments at variance. First judgment was delivered in Mohsin Raza v. Chairman, Federal Board of Revenue and others (2009 PTD 1507), accepting the petitions, mainly, for the reason that Commissioner could not invoke the provisions of Section 177(4) in absence of criteria to be laid down by CBR under Section 177(1), besides holding that Commissioner had to form an opinion that income declared under Section 120 was incorrect. The other judgment was delivered subsequently in Messrs Sadar Anjuman-e-Ahmedia through General Attorney v. Commissioner of Income Tax (Audit Division), Faisalabad and 3 others (2010 PTD 571), wherein it was held that powers of Commissioner under Section 177(4) were independent of Section 177(1) & (2); Fatima Sharif's Case was relied upon, besides putting emphasis on the words "in addition to" and "also", used in the Section 177(4). Both the judgments, being challenged before august Supreme Court, were decided through judgment in Chairman, F.B.R, and others v. idrees Traders and others (2012 PTD 693), Learned Counsel for appellant department was confronted with letter dated 14.01.2010, whereby notices for selection had been withdrawn. It was confronted to respondent taxpayer, based on judgment in Commissioner of Income Tax v. Messrs Eli Lilly Pakistan (Pvt.) Ltd. (2009 SCMR 1279 = 2009 PTD 1392), that Constitutional jurisdiction could not be availed without resorting to departmental remedies. Consequently both the assailed judgments i,e,, and Sadar Anjuman-e-Ahmedia, were set aside in following. "When confronted with the contents or the above letter Mr. Muhammad Ilyas Khan and other learned counsel appearing for the revenue department could not make categorical statement however learned counsel for the respondents stated at bar that in view of the above policy the letters have already been withdrawn and instant discussion is nothing but an academic exercise as the relief has already been given to the tax payers by the competent authority following the above policy. 5. After having heard the learned counsel and having gone through the relevant contents of the judgments under challenge as well ratio decided in the case of Eli Lilly Pakistan (ibid) and the policy letter noted above we proceed to decide the appeals as follows:--- (i) In all the appeals listed above both the judgments dated 14th July, 2009 and 22nd October, 2009 are set aside. (ii) The department is directed to follow the policy in letter and spirit. which has been reproduced hereinabove and if the letters have not been withdrawn, reasons should be assigned and after providing opportunity to the respondents, it be clearly pointed out to them that their cases are not covered under the policy and they may apply afresh if need be. (iii) If the department intends to proceed, then sufficient opportunity be given to the tax payers to put up the pleas so that no prejudice may cause to them in any manner."
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11. It is important to note that the judgment in Syed Bhais' Case, supra, was not set aside, therefore, holds the field, in light of law laid down by apex Court in Fatima Sharif and Media Network's Cases. Disclosure of objective criteria/reasons, before filing of returns, for selecting a case for audit has consistently been claimed by taxpayers, since selection for total audit under the Repealed Ordinance, despite existence of the law laid, down in Media Network's Case that 'non-disclosure of guidelines to select for audit does not take away any vested right and that for preliminary inquiries/investigations, non-disclosure does not infringe the principles of natural justice. In Fatima Sharifs Case Commissioner was directed to issue fresh notice for selection, disclosing criteria/reasons because the provisions of Section 177(1), as existing at relevant time, were so interpreted in Muhammad Hussain's Case, however, deletion of paragraphs from its judgment; contain finding that selection for audit is prejudicial to taxpayer, was in consonance with the earlier finding in Media Network's Case that selection for audit does not take away any vested right and that audit proceedings, being administrative in nature were not prejudicial. Syed Bhais' judgment, by this Court, ratified the law that publication of criteria before filing of returns was not mandatory. It was clarified that selection for audit by Commissioner on the criteria by FBR, under the Section 177(1), was different from the Commissioner's independent power to select for audit under the Section 177(4). The direction, through Fatima Sharif's Case, of disclosing criteria/reasons, was held as mandatory for selection by Commissioner independently. The law holding field, till this stage i,e, before amendments through Finance Act 2010, can conclusively be summarised as under:-- (i) Guidelines (Selection criteria) are not required to be disclosed beforefiling of returns under Self-assessm ent; (Media Network's Case) (ii) Commissioner is bound to disclose the reasons/criteria in the notice if selecting the cases for audit independently; (Fatima Sharifs Case) (iii) Commissioner is bound to follow the criteria of selection, if laid down by the FBR; (Syed Bhai's Case) and (iv) Commissioner has independent power to select for audit under Section 177(4) and his power to select on the criteria given by FBR is different. (Syed Bhai's Case) Notwithstanding the law, ibid, taxpayers once again pleaded, in the petitions, decided through Chenone Stores Case, that absence of 'objective criteria had offended the equality clause as Commissioner had exercised unguided and unbridled discretion by picking and choosing the taxpayer for audit. 12. Through Finance Act, 2010; FBR has been given powers, for the first time under the Ordinance of 2001 to select for audit by inserting Section 214C in it.…
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