MUHAMMAD UMER VS COMMISSIONER INCOME TAX, KARACHI, 2009 PTD-KARACHI-HIGH-COURT-SINDH 284 (2008)

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

----S. 177(4)---Selection of case for audit---Scope---Provision of S.177(4) of the Income Tax Ordinance, 2001 provides that the Commissioner will select a person for audit of his income tax affairs having regard to certain conditions---Nowhere in S.177, it is mentioned that the return of income will be selected for audit but the only thing which has been mentioned is that persons selected by the Commissioner can be subjected to the audit of their income tax affairs---Even in cases where return or statement has not been filed, any person can be selected for the audit of his income tax affairs provided the conditions therein have been met.

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

----Ss. 133 & 177---Reference to High Court---Selection of case for audit---Disputed question of fact---Statement of assessee that his case was selected by the Taxation Officer was contradictory to the observations in the assessment year which had not been specifically contradicted by the assessee, being a disputed question of fact which could not be resolved by High Court in its advisory jurisdiction.

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

----Ss. 113-A & 2(63)---Tax on income of certain persons---Presumptive tax under various provisions including S.113-A, Income Tax Ordinance, 2001 is "income tax" payable on such income and even in S.113-A(3) of the Ordinance it is specified that the tax paid under said section shall be on income arising from the turn-over---Contention that if a statement is filed under S.113-A it means that the assessee is not paying "tax" but is paying "turnover tax" only which does not fall within the definition of "tax" was repelled.

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

----S. 120(1-A)--Assessment---Selection of case for audit---Provision of S.120(1-A) Income Tax Ordinance, 2001 reveales that subsection (1-A) only provides that even those cases can be selected for audit in which the return filed has been accepted and has been converted into an assessment order---Section 120(1-A), however, does not provide that, except those persons who had filed returns which were deemed to have been assessed under S.120, no other person can be selected for audit of his tax affairs.

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

----S. 177---Selection of case for audit---All categories of persons irrespective of the fact whether they have filed return or not can be selected for audit under S.177, Income Tax Ordinance, 2001---Ground of selection that sales have been reduced by more than 50 per cent and it was necessary to audit to verify these sales is a very valid reason for selection of case for audit.

Trading Corporation of Pakistan (Pvt.) Ltd., Karachi v. Commissioner of Income Tax, Companies Zone-III, Karachi 2006 PTD 1362 distinguished.

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

----S. 133---Reference to High Court---Academic questions declined by High Court to answer.

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

----Ss. 177(4), 115(4) & 113-A---Selection of case for audit---Scope--Statement filed under S.115(4) read with S.113-A, Income Tax Ordinance, 2001, could be selected for audit under S.117 of the Income Tax Ordinance, 2001.

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

----S. 183---Reference to High Courts-Question referred being against the finding of fact given by the Appellate Tribunal, High Court declined to answer.

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

----S. 177---Selection of case for audit---Prior notice to assessee---Requirement---No prior notice is required before selection of case for audit and if after issuance of intimation regarding selection of case for audit the assessee is able to convince the authorities that his case has wrongly been selected, the notice can be withdrawn---Even after the issuance of the notice intimating the selection of case the contention of the assessee for removal of his case from audit was considered and rejected, the principles of natural justice had not been violated.

Syed Irshadur Rahman for Applicant.

Jawaid Farooqui for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.---By this Income Tax Reference Application the following questions said to be arising from the order of the Income Tax Appellate Tribunal (Pakistan) Karachi, dated 30-6-2007 in I.T.A. No.193/KB of 2007 have been proposed for the opinion of this Court:--

(1) Whether the statement filed by the appellant under section 115(4) read with section 113-A of the Income Tax Ordinance, 2001 under the presumptive/final tax regime is a return/complete return of income as envisaged under section 114 read with section 120 of the Ordinance ibid?

(2) Whether the learned ITAT is justified in holding that a statement filed under section 115(4) read with section 113-A of the Income Tax Ordinance, 2001 could be selected for audit under section 177 of the Ordinance, ibid?

(3) Whether the learned ITAT is justified in upholding the departmental action of selection of the taxpayer's case for audit for the tax year, 2005 when the said selection has not been made by the commissioner himself and that too, without a prior notice before final selection of the case?

2. We have heard Mr. Syed Irshadul Rahman counsel for the applicant and Mr. Jawaid Farooqui counsel for the respondent.

3. The learned counsel for the applicant submitted that the applicant is .a person who had filed statement under section 115(4) of the Income Tax Ordinance as his case fell within the ambit of section 113-A of the Income Tax Ordinance, 2001 by which he had to pay tax at the fixed rate on his turnover. He submitted that the Taxation Officer vide his letter No.159 of 2006, dated 6-4-2006 informed him that his case has been selected for the audit for the tax year, 2005 under the provisions of clause (d) of section 117(4) of the Income Tax Ordinance, 2001 allegedly for the reason that sale declared for the year in question declined to half of the sales as compared to tax year, 2003. According to the learned counsel since he had not filed return of income and no assessment had been framed under section 120 of the Income Tax Ordinance, therefore, his case could not be selected for total audit under section 120. His contentions were not accepted by the departmental authorities and vide order under section 121(1) of the Income Tax Ordinance his assessment was finalized at total income of Rs.22,81,280. Being aggrieved by the above order he had filed an appeal before the CIT(Appeals), who vide his order No.CIT/A-2/180, dated 17-11-2006 dismissed the appeal. Being aggrieved by the above order of CIT(Appeals) the applicant filed an appeal before the Income Tax Appellate Tribunal who vide the impugned order dismissed the appeal and upheld the order of the CIT(Appeals). Hence the applicants preferred this reference application.

4. The first argument of the learned counsel was that his case could not be selected for total audit as section 177 provides that persons will be selected for audit of his income tax affairs. He submitted that since he is not required to pay income tax and is only paying turnover tax under section 113-A of the Income Tax Ordinance, he does not have any tax affairs which can be subjected to audit under this section. The learned counsel in support of his contention drew our attention to section 120(1) of the Income Tax Ordinance, which provides that where a taxpayer furnishes complete return, the Commissioner shall be bound to pass an order on the basis of such return and then drew our attention to subsection (1-A) of section 120 a non-obstante clause, which provides that notwithstanding the provisions, of subsection (1) the Commissioner may select a person for audit of his income tax affairs under section 177 and according to the learned counsel this section provides that only those cases can be selected for audit in which return of income had been filed and since he had not filed return of income, learned counsel argued, his case could not be selected for total audit. The learned counsel also argued that the provisions of section 120 will prevail over the provisions of section 177.

5. The second argument of the learned counsel was that only the Commissioner can select a person for audit and since his case had been selected by the Taxation Officer and that too without issuance of notice, therefore, the action of selecting such case for audit cannot be sustained.

6. The learned counsel also took us through the definition of tax given in section 2(63) of the Income Tax Ordinance and the taxable income defined in section 9 of the Ordinance to point out that the tax paid by him under section 113-A does not fall within the definition of tax under section 2(63) and that taxable income does not include turnover declared in the statement under section 115(4) read with section 113-A. He also vehemently argued that his case could not be selected for audit without issuance of show-cause notice and that too only by the Commissioner and not the taxation officer. The learned counsel has also argued that no reason have been specified for selecting the case for total audit and such order cannot be sustained. In this connection he relied on the judgment of this Court in the case of Trading Corporation of Pakistan (Pvt.) Ltd., Karachi v. Commissioner of Income Tax Companies Zone-II, Karachi 2006 PTD 1362.

7. Mr. Jawaid Farooqui learned counsel for the respondent read out the contents of section 177 and pointed out that this section provides for selection of a person for audit of his tax affairs and does not provide for selection of returns for audit. He strongly opposed the arguments of the learned counsel and stated that the filing of a statement under section 115(4) of the Income Tax Ordinance does not means that the person has not paid tax and, therefore, cannot be selected for audit. He stated that although a notice is not necessary to select a case for audit but in case of the applicant since he had strongly protested against the selection of case for audit, not on the point of non-issuance of show-cause notice but on the point of jurisdiction of the taxation officer, therefore, a reply was given to him by the Commissioner and the Taxation Officer was directed to continue the proceedings of audit which means that his objection against selection of case for audit was noted and rejected.

8. We have examined the case in the light of the arguments of the learned counsel and have perused the records of the case and carefully examined the provisions of law which are subject matter of this reference. Since the controversy revolves around the interpretation of section 177 of the Income Tax Ordinance, 2001 it will, therefore, be pertinent to reproduce this section for the sake of convenience:--

"(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 subsection (1).

(3) The (Board) 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 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;

(v) 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, 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 audits, particularly having regard to the factors in sub-section (4).

(8) The Board 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 Board 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 purpose of conducting an audit under that subsection.

9. From a perusal of the above section it is seen that in sub-section (4) which deals with the selection for audit, it is specifically mentioned that the Commissioner will select a person for audit of his income tax affairs having regard to certain conditions. Nowhere in this section it is mentioned that the return of income will be selected for audit but the only thing which has been mentioned is that persons selected by the Commissioner can be subjected to the audit of their income tax affairs. On reading of this section we are of the considered opinion that even in cases where return or statement has not been filed, any person can be selected for the audit of his income tax affairs provided the conditions therein have been met.

10. The learned counsel has further submitted that his case was selected by the Taxation Officer. On examination of the impugned order under section 121(1) we have seen that it is mentioned in the assessment order that the Commissioner has selected the applicant for the audit of his tax affairs vide letter No.4671 of 2005, dated 9-5-2005 and the taxation officer by this letter No.159 of 2006, dated 2-4-2006 has only informed the applicant that he has been selected for the audit of his income tax affairs for the reason that sales declared for the year in question have declined to half of the sales as compared to the tax year, 2003. We are, therefore, of the opinion that the statement of the learned counsel that his case was selected by the taxation officer is contradictory to the observation in the assessment year which has not been specifically contradicted by the applicant and is, therefore, a disputed question of fact which cannot be resolved in this advisory jurisdiction.

11. We are also not impressed by the arguments of the learned counsel that if a statement is filed under section 113-A it means that the applicant is not paying tax but is paying turnover tax only which does not fall within the definition of tax. On an examination of Chapter II subsections 2 of section 4 which provides that income tax. payable by taxpayer for a tax year shall be computed by applying rate or rates applicable to the taxpayer under this Ordinance, we are of the considered opinion that presumptive tax under various sections including section 113-A is income tax payable on such income and even in subsection 3 of section 113-A it is specified that the tax paid under this section shall be on income arising from the turn over.

12. Coming to the arguments of the learned counsel that section 120(1-A) provides that only those cases shall be selected for audit in which return had been filed and had been assessed. We would like to observe that a plain reading of subsection (1-A) of section 120 reveals that this subsection only provides that even those cases can be selected for audit in which the return filed has been accepted and has been converted into an assessment order. This subsection, however, does not provide that, except these persons who have filed returns which have been deemed to have been assessed under section 120, no other person can be selected for audit of his tax affairs.

13. The Tribunal has very exhaustively dealt with the arguments of the learned counsel and has stated that all categories of persons irrespective of the fact whether they have filed return or not can be selected for audit under section 177. The judgment relied on by the learned counsel for the applicant is also distinguishable as in that case no reasons were spelt out for selection of total audit whereas in this case a very valid reason has been given for selecting the case of applicant for audit on the grounds that sales have been reduced by more than 50 per cent and it was necessary to audit to verify these sales.

14. We are therefore, of the considered opinion that despite the fact that the learned counsel had very ably tried to infuse life in a lost cause but his arguments are misconceived and the law is so much clear that we can place no other interpretation on this section than the one placed by the Tribunal.

15. On an examination of the three proposed questions we find that question No.1 has no nexus with the case in the light of our above observations because the subject of controversy is not whether a statement under section 115(4) read with section 113-A can be considered as a complete return of income as envisaged under section 115(4) read with section 120 of the Ordinance. We are of the opinion that this is only an academic question, the answer of which will not resolve the controversy in issue and we are not inclined to answer academic questions.

16. So far question No.2 is concerned, we are of the considered opinion that there is nothing in section 177(4) from which it can be inferred that a person who had filed a statement under section 115(4) read with, section 113-A of the Income Tax Ordinance, cannot be selected for audit of his tax affairs under this section. We, therefore, answer question No.2 in affirmative.

17. So far as question No. 3 is concerned this question is against the finding of fact given by the Tribunal and, therefore, we refuse to answer this question.

18. As far as the issue of prior notice is concerned we agree with the learned counsel for the respondent that no prior notice is required before selection of case for audit and if after issuance of intimation regarding selection of case for audit the taxpayer is able to convince the authorities that his case has wrongly been selected, the notice can be withdrawn. We also agree with the contention of the learned counsel that in this case even after the issuance of the notice intimating the selection of case the contention of the applicant for removal of his case from audit was considered and rejected and thus principles of natural justice have not been violated.

19. The above are the reasons in support of our short order, dated 4-12-2008 passed in Court, whereby after hearing the learned counsel for the parties, we have dismissed this Income, Tax Reference Application.

M.B.A./M-230/KOrder accordingly.