SADIQ HUSSAIN MAJID VS SECRETARY, GOVERNMENT OF PAKISTAN and others, 2007 PTD-LAHORE-HIGH-COURT-LAHORE 2188 (2007)

(a) Income Tax Ordinance (XLIX of 2001)---

----S.177 [as substituted by Finance Act (II of 2004)]---Central Board of Revenue's Circular No.7 of 2002, dated 15-6-2002, para.9(a)(ii)---Selection of return for audit without issuing to assessee prior show-cause notice under, C.B.R. Circular No.7 of 2002, dated 15-6-2002---Validity---Such circular would be relevant under old provision of S.177 of Income Tax .Ordinance, 2001, but not after same was substituted by Finance Act, 2004---Issuance of pre-selection notice not required by newly substituted provision of S.177 of Income Tax Ordinance, 2001, which required issuance of show-cause notice after selection of return by Commissioner for its re-opening and auditing---Principles.

Messrs Syed Bhais Ltd. v. C.B.R. and others W.P. No.S471 of 2006 and (2006) 94 Tax 317 ref.

Ch. Muhammad Hussain, Shakargarh and others v. Commissioner of Income Tax, Sialkot 2005 PTD 152 distinguished.

(b) Circulars etc. by Central Board of Revenue---

----Circulars/Notifications/Instructions issued by Central Board of Revenue under old law---Applicability of such Circulars/Notifications/ Instructions to substituted or re-enacted law with regard to same subject -matter---Principles.

Circulars/Notifications/Instructions issued under old law are applicable even to new re-enacted law with regard to the same subject-matter, but cannot prevail upon or override the substituted or re-enacted statutory law, if they are contrary to the provisions of the parent Act, which is provided by any Act of the legislature. These provisions fire supporting subordinate legislations to fulfil the aim and the very purpose of the-provision of main law and cannot nullify the provision of parent Act itself.---[Interpretation of statutes---Fiscal statutes].

(c) Natural justice, principles of---

----Principle of audi alteram partem is applicable, when an adverse order or action is going. to be passed or taken against a person.

Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others (2006) 94 Tax 317 (S.C. Pak.)

C.As. Nos. 233-315 of 2004 rel.

Shamshir Iqbal Chughtai for Petitioner.

Masud Ashraf Sheikh for Respondents.

Date of hearing: 12th January, 2007.

JUDGMENT

SH. HAKIM ALI, J.---Sadiq Hussain Majid, claiming to be proprietor of Messrs Al-Majid Electronics, Circular Road, Bahawalpur has filed the instant writ petition with the following prayers:.---

(i) Action dated 19-8-2006 (intimation for selection) of audit of income tax return under section 177 of the Income Tax Ordinance, 2001, issued by respondent No.3, Commissioner of Income Tax, Bahawalpur without awarding opportunity of hearing to the petitioner, be declared illegal and unlawful.

(ii) Issuance of a direction to respondent No.2, Regional Commissioner of Income Tax, as well as to Commissioner of Income Tax, Bahawalpur, respondent No.3 to decide the objection petition/representation dated 21-8-2006 and 1-9-2006.

(iii) To comply with the provisions of section 120 of the Income Tax Ordinance, 2001.

(iv) Issuance of an interim injunction restraining respondent No.2 from initiation of proceedings of selection of petitioner's case for the purpose of audit, and

(v) Grant of any other relief deemed fit by this Court.

2. With these above noted prayers of writ petitioner, notices were issued to respondents with direction to submit their parawise reply and 'comments. Respondent No.3 has submitted parawise reply and comments in the form and shape of written statement also.

3. The facts as narrated, stated and reasons submitted by both the learned counsel for the parties arc that Sadiq Hussain Majid is a taxpayer having proprietorship of Messrs Al-Majid Electronics, situated in 2-A/II Trust Colony, Bahawalpur. He had filed income tax return under Self-Assessment Scheme for the tax year 2005. He had also filed another revised return on 16-6-2006 for the same tax year of 2005. On 19-13-2006, he was issued a notice/intimation under section 177 of the Income Tax Ordinance, 2001 by Commissioner of Income Tax, Bahawalpur Zone, Bahawalpur, respondent No.3, intimating him that your return was selected for the audit of your income tax affairs under clauses (a) & (d) of subsection (4) of section 177 of the Income Tax Ordinance, 2001. Aggrieved from the issuance of the above noted intimation dated 19-8-2006, he has filed the present writ petition.

4. Petitioner's learned counsel submits that before issuance of intimation dated 19-8-2006, petitioner was to be issued show-cause notice for setting apart of return of income tax under para.9(a)(ii) of C.B.R.'s Circular No.7 of 2002 issued by Government of Pakistan, Revenue Division, Central Board of Revenue on 15th June, 2002, as was done in case of Messrs Sana Shoes, Chowk Bazar, Bahawalpur {Annexure "F-1" dated 4-2-2003) Messrs Pervaiz Ice Factory, noted One Unit, Bahawalpur (Annexure "F-2" dated 5-6-2006) and Messrs Sial Jewel Collection, Chowk Fawara, Bahawalpur, (Annexure "F.3" dated 7-6-2006). As per learned counsel, the intimation issued on 19-8-2006 to writ petitioner is an act of discrimination as against the above noted assessees, who were issued show-cause notices prior to selection but the petitioner was issued direct intimation of selection for audit under section 177 of the above noted Ordinance. To fortify his arguments, ]earned counsel has relied upon the judgments reported in 2005 PTD 152 Ch. Muhammad Hussain, Shakargarh and others v. Commissioner of Income Tax, Sialkot and an unreported judgment dated 28-2-2006 of the Hon'ble Supreme Court of Pakistan (Commissioner of Income Tax etc. v: Messrs Media Network and others). In nutshell, the case of the writ petitioner is that without issuance of show-cause notice under Circular No.7 of 2002 dated 15th June, 2002 as directed by C.B.R., further proceeding and action is illegal and unlawful.

5. Responding to the arguments, learned counsel for the respondents submits that there was no need of issuance of pre-show -cause notice prior to the intimation issued by respondent No.3, because of old provision of section 177 of the Income Tax Ordinance, 2001 was substituted by the Finance Act, 2004 and the latest provision of section 177 has provided another mechanism for initiation of proceedings. According to the learned counsel for the respondents, the issuance of show-cause notice was at present not necessary under Circular No.7 of 2002 dated 15th of June, 2002 of C.B.R., because that was a circular issued under the old law of section 177 of the Income Tax Ordinance, 2001, whereas the scheme of the present section 177, after the promulgation of Finance Act, 2004, was altogether changed. As regards the notices referred to by the learned counsel for the petitioners, those were issued either when the old law was in force or were issued due to mistaken comprehension of respondent No.3, predecessor of the present Commissioner of Income Tax, who was not aware of the judgment of Messrs Syed Bhais Ltd. v. C.B.R. etc. (W.P. No.5471 of 2006) delivered by his Lordship Mr. Justice Syed Hamid Ali Shah on 30-6-2006 and the judgment of the Hon'ble Supreme Court of Pakistan published in (2006) 94 Tax 317 (SC Pak.). Therefore, the intimation issued by respondent No.3 is legal and may not be declared illegal and unlawful.

6. Considering the lengthy arguments of both the learned counsel and examining the record, the factual and legal aspect of the case, I would like to reproduce provision of section 177 of the Income Tax Ordinance, 2001 as substituted by Finance Act, 2004 in the instant judgment before moving towards:---

"177. Audit.---(1) The Central Board of Revenue, may lay down criteria for selection. of airy person for an audit of persons income tax affairs, by the Commissioner.

(2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the Central Board of Revenue under subsection (1).

(3) The Central Board of Revenue shall keep the criteria confidential.

(4) In addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of the persons 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.

(5) After selection of a person for audit under subsection (2) or (4), 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.

(6) After completion of the audit under subsection (5) or sub-section (8), 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.

(7) 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 audit, particularly having regard to the factors in subsection (4).

(8) 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 to case basis.

(9) Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioner, in writing to exercise the powers in sections 175 and 176 for the purposes of .conducting an audit under the subsection."

7. From the examination and analysis of the provision of section 177 of the Income Tax Ordinance, 2001 as substituted by Finance Act, 2004, it appears that the criteria laid down through circular No.7 of 2002 by C.B.R. on 15th of June has lost its efficaciousness and effectiveness due to introduction of substituted provision of section 177 of the Ordinance, because it has now provided another mechanism acid scheme for selection of person for an audit for income tax affairs. According to the provision of section 177 of the Income Tax Ordinance, 2001, two methods for selection have been envisioned. One is selection by the Commissioner on the basis of criteria laid down by the Central Board of Revenue, which criteria have been kept confidential by the Act itself. The other method of selection has been provided by subsection (4) of section 177 of the Income Tax Ordinance, 2001. According to that, Commissioner has been authorized to select a person for an audit for income tax affairs but prior to it he is required to examine and keep in view the conditions prescribed by clauses (a) to (d) of section 177 of the Income Tax Ordinance, 2001. For this selection, Commissioner, has been empowered by the Ordinance itself. I need not dilate upon the provisions of clauses (a) to (d) because these requirements, which are provided for the Commissioner, are to be followed by the Commissioner himself before proceeding with the case for an audit of the persons of income tax affairs. Question which has been posed in the present case is that show-cause notice must have been issued before issuance of intimation referred to above to the writ petitioner or not'? According to the above noted provisions of section 177 of the Income Tax Ordinance, 2001, there is no such provision requiring such a show-cause notice to be issued to the petitioner before proceeding for selection of an assessee of income tax return. The judgment referred to by the learned counsel for the petitioners of Ch. Muhammad Hussain, 5hakargarh and others v. Commissioner of Income Tax, Sialkot 2005 PTD 152 has proceeded on the basis of Circular No.5 dated 30-6-2003. This judgment was pronounced when substituted section by Finance Act, 2004, was not in picture. Therefore, that judgment referred to by the learned counsel for the petitioners is not applicable to the facts and circumstances of this case. It may be relevant in the old law, but not for the new law as substituted by Finance Act, 2004. The same is the case with the Circular No.7 of 2002, which was issued when the old law was applicable. The controversy has been set at rest by my learned brother Mr. Justice Syed Hamid Ali Shah through his elaborate judgment announced on 30-6-2006 in case of Messrs Syed Bhais Ltd. v. C.B.R. etc. (W.P. No.5471 of 2006) and the judgment of the Hon'ble Supreme Court as reported in (2006) 94 Tax 317 (S.C. Pak.) (Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others).

8. It may be clarified here that circulars, instructions/notifications 'issued under old law are applicable even to new re-enacted law with regard to the same subject-matter but cannot prevail upon or overrule the substituted or reenacted statutory law if they are contrary to the provision of the patent Act, which is provided by any Act of the legislature. These instructions arc supporting subordinate legislations to fulfil the aim and the very purpose of the provision of main law and cannot nullify the provision of parent Act itself. The scheme provided under section 177 to my mind, has negated the issuance of any show-cause notice during the selection process of a person for an audit of person income tax affairs which was provided in Circular No.7 of 2002 dated 15-6-2002. After the substitution of section 177 of Income Tax Ordinance, 2001, Finance Act, 2004, the requirement of circular cannot be considered to be an essential requirement. Show-cause notice is to be issued after a selection is made by Commissioner for reopening and auditing of the return. Pre-selection notice is not the requirement of the newly substituted provision of section 177 of Income Tax Ordinance, 2001. Before parting with this judgment, I would like to add here that principle of audi alteram partem is applicable when an adverse order or action is going to be passed or taken against a person. The principle and its applicability are beautifully dealt with in para. 26 of the judgment of C.As. Nos. 233-315 of 2004 etc. delivered on 28th February, 2006 by his Lordship Mr. Justice Faqir Muhammad Khokhar of the Hon'ble Supreme Court of Pakistan, which can provide guidelines to all concerned in this regard. Therefore, this writ petition is dismissed with no order as to costs.

S.A.K./5-120/LPetition dismissed.