MUNEER BHIMJEE VS ISLAMIC REPUBLIC OF PAKISTAN, 2005 PTD-KARACHI-HIGH-COURT-SINDH 1974 (2005)

Income Tax Ordinance (XLIX of 2001)---

----Ss. 114, 120(I)(b), 77 & 177(1-A)---Return under Universal Self-Assessment Scheme, filing of---Issuance of notice to assessee selecting his case for total audit without assigning any reason or giving details therefor, or pointing out any of the clauses of S.117 of Income Tax Ordinance, 2001---Validity---Authority intending to initiate such proceedings against assessee would be bound to incorporate in notice relevant grounds, reasons and clauses of S.117 of Income Tax Ordinance, 2001 for enabling him to find out the rationale/criterion and justification for selecting his case for total audit---Return qualifying for acceptance under such Scheme would be deemed to be assessment order passed by Commissioner on the date return was furnished---Such assessment would remain protected against any bald or arbitrary action---Proceedings initiated against assessee on the basis of such notice would be defective and on its basis no further action would follow against him.

Ch. M. Hussain Agency Dealer v. Commissioner of Income Tax, 2005 PTD 152 fol.

Shahid Pervez Jami for Petitioners.

Aqeel Ahmed Abbasi and Javed Farooqui for Respondents.

Date of hearing: 15^th February, 2005.

JUDGMENT

ANWAR ZAHEER JAMALI, J.---By these three identical Constitutional Petitions, action taken by the Respondents Nos.2 and 3, purportedly in exercise of their powers under sections 177/177(1A) of the Income Tax Ordinance, 2001, by issuing notices, dated 29th April, 2004 to the petitioners in C. P. Nos. D-1048 of 2004 and D-1096 of 2004 and letter/order, dated 30th April, 2004 to the petitioner in C.P. No. D-1047/2004, intimating them about selection of their assessment case for the tax year, 2003 for audit, has been assailed by the petitioners. The identical prayers made in these petitions read as under.-

(a) Declare the selection of petitioner's case for audit on the basis of above said parameters ultra vires and against the Articles 2A, 4 and 227 of the Constitution of Islamic Republic of Pakistan.

(b) Direct the respondents Nos.2 and 3 to withdraw their order/notice of total audit on the basis of claiming of refund.

(c) Cost of petition is awarded to the petitioner.

(d) Any other and or better relief, which this Hon'ble Court may deem fit under the circumstances of the case, be granted to the petitioner.

2. The relevant facts forming background of these proceedings, divulged from the memo. of petitions are that on 29-9-2003 all the petitioners had submitted their respective income-tax returns for the assessment year 2003 under the Universal Self-Assessment Scheme covered by section 114, which according to them, in due course had attained finality in terms of the provisions of section 120(1)(b) of the Ordinance. Later on the Respondent No.2, had issued impugned notices/ letters to the petitioners, intimating them about selection of their tax assessment cases for the year, 2003 for audit, as contemplated under sections 177/177(1A), without assigning any reason or giving details for doing so.

3. To impugn such bald action, the short submission of the learned counsel for the petitioners is that above referred notices/letters issued by the Respondent No.2 do not meet the conditions/requirements of section 177 of the Income Tax Ordinance, 2001, (as it stood at the relevant time). The relevant provisions of section 177 read as under:--

"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

(1A)???? After selection of a person for audit under subsection (1), 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.

(1B)???? After completion of the audit under subsection (1A) or subsection (3), the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment under subsection (1) or subsection (4) of section 122, as the case may be.

(2)??????? The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits, particularly having regard to the factors in sub-section (1).

(3)??????? The Central Board of Revenue may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income-tax affairs of any person and the scope of such audit shall be as determined by the Central Board of Revenue on a case by case basis.

(4)??????? Any person employed by a firm referred to in subsection (3) may be authorized by the Commissioner, in writing, to exercise the powers in sections_, 175 and 176 for the purpose of (conducting) audit under that subsection"

4. To fortify his submission that mere formal intimation notice, containing no details or reasons for such selection and without pointing out any of the clauses of section 177 of the Ordinance is defective, therefore, cannot be made basis for any further proceedings or action in the matter. Learned counsel has strongly placed reliance on the observations of the learned' Single Judge of Lahore High Court in the case of Ch. M. Hussain Agency Dealer v. Commissioner of Income Tax, 2005 PTD 152 which read as under:--

"This provision leaves no ambiguity regarding the fact that return of an assessee filed under section 114, at the strength of section 120 of the Income Tax Ordinance, 2001, becomes an assessment order the moment, it is filed and receipt thereof, is acknowledgment by the Department, by operation of law, if found to be completed and no notice under subsection (3) of the latter mentioned section is issued. The primary point which hinges for determination is as to whether after once having passed an assessment order by accepting the returns, the same could be reopened for audit or otherwise, without notice/hearing of the assessee and that too, without giving any reason, without pointing out any of the clauses of section 177 of the Ordinance, as to under what clause and category he is being subjected to scrutiny. The abrupt answer is No, it cannot be done because under clause (a) audit can be done keeping in view the person's history of compliance or non-compliance with the Ordinance, while proceeding under clause (b), the amount of tax payable by the person has to be kept in mind, under clause (c), class of business conducted by the assessee, has to be considered and under the remaining clause (d), Commissioner can proceed against any person for any other reason which is considered by him to be relevant. Under last mentioned clause, unless the Commissioner Income Tax narrates reasons for the action of picking the persons for audit, his order would not reflect his mind, which is not the intention of law, as the same is obvious from the language of clause (d). This brings me to hold that Commissioner Income Tax can proceed against any person but while so doing he has to mention under the clause of section 177(1) of the Ordinance, 2001, under which he proposed to proceed and at the same time, he has to give reasons for the action against the assessee because his assessment order is to be reopened and declaration in the return is to be scrutinized which is an order adverse to the provisions of section 120 of the Ordinance (ibid)".

"Absence of reasons logic of any kind in the impugned order clearly depicts non-application of conscious judicial mind by the Commissioner Income Tax before issuing it, who by so doing appears to have acted mechanically."

"I have no hesitation to hold that the impugned order/notice is detective as the same lacks the essentials required by law to be noted therein which at the same time is abuse of exercise of the vested discretion and thus, the same is not sustainable at law and is declared to be illegal/void and non existent. "

5. Learned counsel Mr. Shahid Pervez, therefore, urged that the impugned notices/letters may be struck down, leaving it open for the respondents to proceed/act strictly in accordance with law.

6. Messrs Aqeel Abbasi and Javed Farooqui, Advocates for the respondents in these petitions, when confronted with this legal position are unable to controvert that the purported action of the Respondent No.2 by issuing impugned notices/letters to the petitioners does not meet the requirements of section 177 of the Income Tax Ordinance, 2001.

7. In our view, in case the Commissioner of Income-tax intended to initiate proceedings against the petitioners in terms of section 177 of the Income Tax Ordinance, 2001, it was necessary for him to have incorporated the relevant grounds, reasons and clauses of section 177 of the Ordinance to enable the assesses to find out the rationale/criterion and justification for selection of his case for audit within the scope of section 177 of the Ordinance. Moreso, as otherwise, by virtue of section 120(b) of the Ordinance, a return qualifying for acceptance under the universal self-assessment was deemed to be the assessment order made and issued by the Commissioner on the date the returns were furnished. Thus, it enjoyed protection against any bald or arbitrary action, which will be against the very spirit of Self-Assessment Scheme available under the Ordinance.

8. In view of the above, we dispose of these petitions with the observation that the proceedings initiated by the respondents on the basis of impugned notices/letters are defective therefore, no further action shall follow against the petitioners, on the basis of such defective notices. However, it will open to respondents Nos.2 and 3 to initiate fresh proceedings of audit against the petitioners, but strictly in terms of section 177 of the Income Tax Ordinance, 2001.

Petitions stand disposed of accordingly.

S.A.K./M-224/K???????????????????????????????????????????????????????????????????????????????? Order accordingly.