NOBLE (PVT.) LTD. through Manager Finance and Administration VS FEDERAL BOARD OF REVENUE through Chairman, 2009 PTD-KARACHI-HIGH-COURT-SINDH 841 (2009)

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

----Ss. 120, 122 & 177---Return finalized under S.120(1) of Income Tax Ordinance, 2001 amended under S.122(5-A) of Income Tax Ordinance, 2001 after detailed scrutiny---Selection of such case by Commissioner for audit under 5.177 of Income Tax Ordinance, 2001 for same reasons on basis of which action under S.122(5-A) thereof had been taken---Validity---Procedure for selecting case for audit was different from procedure adopted for amending order under S.122(5-A) of the Ordinance-Case once selected for audit should be subjected to strong audit and discrepancies in record, if any, should be highlighted for either confirming order passed or taking action for its amendment---Assessment order amended under S.122 of the Ordinance, should be pointed in favour of selecting a case for audit as on basis of amendment of order, assumption would be that return converted into assessment order could not be relied on---Income Tax Ordinance, 2001 did not bar selection of case for audit under S.177 thereof, if for same tax year action had already been taken under S.122 thereof---Selection of case for total audit under S.177 of the Ordinance and action under S.122 thereof being different actions, no bar existed for initiating both actions for same tax year even on identical points---Commissioner had powers to select cases for audit even before promulgation of S.120(1-A) of the Ordinance thus, S.120(1-A) had retrospective effect---Impugned order was legal and with jurisdiction---Principles.

Central Insurance Co. and others v. Central Board of Revenue 1993 SCMR 1232 = 1993 PTD 766 and Premier Mercantile Services (Pvt.) Ltd. v. C.I.T. 2007 PTD 2521 ref.

(b) Interpretation of statutes---

----Duty of Court was first to arrive at intention of legislature and then to arrive on its basis at interpretation of the relevant section.

Rehanul Hassan Naqvi along with M.S. Lubna Perwaiz for Petitioners.

Jawaid Farooqui for Respondent.

ORDER

MUHAMMAD ATHAR SAEED, J.---This petition has been filed impugning the Notice No. Jud-I/CIT/Cos/I/2007-08/344, dated 29-9-2007 intimating to the petitioner that his case for the tax year, 2005 has been selected for audit under section 177 of the Income Tax Ordinance, 2001 and various reasons for selecting the case have been highlighted in this notice. The petitioner has sought the following reliefs in the petition:--

(i) Declare that the impugned notice No.Jud-I/CIT/Cos.I/2007-08/ 344, dated 29-9-2007 under section 177 of the Income Tax Ordinance, 2001 issued by Commissioner of Income Tax, Companies Zone-I, Karachi, is in excess of his jurisdiction, void ab initio, and of no legal effect.

(ii) Declare that the impugned notice No.Jud/CIT/Cos.I/2007-08/344, dated 29-9-2007 under section 177 of the Income Tax Ordinance, 2001 for the 2005 is based on change of opinion as all the issues raised in the impugned notice were considered during the proceeding under section 122(9) read with 122(5A) of the Income Tax Ordinance, 2001.

(iii) Declare the Commissioner of Income Tax has no jurisdiction to initiate proceedings under section 177 of the Income Tax Ordinance, 2001 for the Tax year, 2005 as the deemed assessment order has been amended under section 122(5A) of the Income Tax Ordinance, 2001 after detailed scrutiny and examination of the books of accounts and record of the petitioner.

(iv) Quash the impugned notice under section 177 of the Income Tax Ordinance, 2001 bearing No. Jud/CIT/Cos.I/2007 issued by Commissioner of Income Tax, Companies Zone-I, Karachi.

(v) Restrain the respondents from taking any action in pursuance of the impugned notice under section 177 of the Income Tax Ordinance, 2001 bearing No.Jud-I/CIT/Cos.I/2007-08/344, dated 29-9-2007 issued by Commissioner of Income Tax, Companies Zone-I, Karachi for audit of the income two affairs of the petitioner.

(vi) Pass any other order that this Hon'ble Court may deem fit and proper in the facts and circumstances of the case.

(vii) Grant cost of the petition.

2. We have heard Mr. Rehanul Hassan Naqvi and Ms. Lubna Perwaiz Advocates for the petitioners and Mr. Jawaid Farooqui the learned counsel for the respondent.

3. The main argument of Mr. Rehanul Hassan Naqvi is that for the tax year, 2005 the respondent had initially issued notice under section 122(9) read with section 122(5A) of the Income Tax Ordinance, 2001 and had on the basis of these notices amended the original order passed under section 120 of the Income Tax Ordinance, 2001 against which the appeal has been filed by the petitioner and the appeal is pending before the appellate authority. The learned counsel submitted that now on the same points on which the notice under section 122(5A) was issued and the order was passed under that section the respondents have selected the case for audit. The learned counsel took us through the provisions of Notice under section 122(5A) and the impugned notice to point out that identical reasons have been stated by the Commissioner in both these notices. He submitted that once an order has been passed under section 122(5A) for any tax year then on the same points and for the same tax year the case cannot be selected for audit as it will tantamount to double jeopardy. He further drew our attention to the provisions of subsection (4) of section 122 and subsection (7) of section 177 to point out that even after amending an order under section 122(5A) of the Commissioner the respondent in this case still has the powers subject to certain conditions, of further amending the said assessment order as many times as may be necessary and under subsection (7) to section 177 he has got the powers to select a case for audit in the immediate next year and following years even if the case has been selected for audit in a particular year.

4. The next argument of the learned counsel is based on the incorporation of subsection (1-A) in section 120 by Finance Act, 2005 wherein it was clarified that notwithstanding the provisions of sub-section (1-A) of section 120 the Commissioner may select a person for audit of his income tax affairs under section 177. On this point the learned counsel referred to the provision of subsection (1-A) of section 120 which provides that once a return of income complete in all respects has been filed the Commissioner shall be taken to have made an assessment of taxable income for the tax year and the return shall be taken for all purposes to be an assessment order issued to the taxpayer by the Commissioner and said that he had filed his return complete in all respects and, therefore, the same had become an order under provisions of this section. He then referred to the clarification issued by the Central Board of Revenue in paragraph 14 of Circular No.1, dated 5th July, 2005 wherein it has been stated that it will come into effect from tax year, 2005. The learned counsel argued that since Finance Act, 2005 relates to the amendments made in the Income Tax Ordinance for the income year starting from Ist July, 2005 which corresponds to the tax year, 2006 therefore the interpretation made by the CBR is not correct and this amendment will come into effect from the tax year, 2006 and since his case is for the tax year, 2005 therefore it cannot be selected for audit under the provisions of section 177.

5. On the point of binding effect of the C.B.R's. interpretation the learned counsel relied on the reported judgment of the Honourable Supreme Court of Pakistan in the case of Central Insurance Co. and others v. Central Board of Revenue 1993 SCMR 1232 = 1993 PTD 766. The learned counsel, therefore, submitted that for those taxpayers who had filed their returns under section 144 and these returns being complete returns had been converted into an assessment order under the provision of section 120 such cases cannot be selected for audit under the provisions of section 177 in view of the incorporation of subsection (1-A) in section 120. He, therefore, prayed that the impugned notice may be quashed.

6. At this juncture we asked Mr. Rehanul Hassan Naqvi the learned counsel for the petitioner whether he would like to argue this matter on any other ground specially the reasons given by the Commissioner for selecting the case for audit, however, the learned counsel rested his case on these two grounds.

7. M. Jawaid Farooqui the learned counsel for the respondent challenged the maintainability of the petition as according to him the case had only been selected for audit and if on the basis of such order an adverse action is taken against the petitioner he will be entitled to all the remedies available under the Income Tax Ordinance. His main argument was that section 122 that is the section for amending an assessment and section 177 are sections which are independent of each other and there is no bar for taking simultaneous actions under both these sections. He specifically read out the provisions of both these sections to point out that section 177 is completely independent of section 122. However, the information gathered through the audit can be utilized for taking action under section 122. The learned counsel submitted that if the legislature wanted to bar the simultaneous action under both these sections then they would have expressly incorporated a provision in section 122 precluding the Commissioner from initiating action under section 177 in respect of cases which have already undergone action under section 122.

8. Opposing second argument of the learned counsel for the petitioner, the learned counsel for the respondent submitted that the Finance Ordinance is always effective for the tax year in which it is promulgated. He further submitted that subsection (1-A) to suction 120 is a procedural section and would apply to all pending proceedings and since return for tax year, 2005 was not filed at the time, subsection (1-A) was incorporated, therefore, it will be applicable in the case of the petitioner for the tax year, 2005. Coming to the facts of the case Mr. Jawaid Farooqui submitted that although some points may be common in the notices under section 122(5A) and under section 177 but certain additional points have also been taken for the selection of the case under section 177. He, therefore, prayed that this petition may be dismissed.

9. We have examined the case in the light of the arguments of the learned counsel and have carefully perused the records of the case and studied the relevant provisions of law. Before we record our findings on such arguments it will be relevant to reproduce sections 120, 122 and section 177 which read as under:--

120. Assessments.---(1) Where a taxpayer has furnished a complete return of income (other than a revised return under subsection (6) of section 114) for a tax year ending on or after the 1st day of July, 2002,--

(a) the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and

(b) the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished.

(1A) Notwithstanding the provisions of subsection (1), the Commissioner may select a person for an audit of his income tax affairs under section 177 and all the provisions of that section shall apply accordingly.

(2) A return of income shall be taken to be complete if it is in accordance with the provisions of subsection (2) of section 114.

(3) Where the return of income furnished is not complete, the Commissioner shall issue a notice to the taxpayer informing him of the deficiencies (other than incorrect amount of tax payable on taxable income, as specified in the return, or short payment of tax payable) and directing him to provide such information, particulars, statement or documents by such date specified in the notice.

(4) Where a taxpayer fails to fully comply, by the due date, with the requirements of the notice under subsection (3) the return furnished shall be treated as an invalid return as if it had not been furnished.

(5) Where, in response to a notice under subsection (3), the taxpayer has, by the due date, fully complied with the requirements of the notice, the return furnished shall be treated to be complete on the day it was furnished and the provisions of subsection (1) shall apply accordingly.

(6) No notice under subsection (3) shall be issued after the end of the financial year in which return was furnished, and the provisions of subsection (1) shall apply accordingly.

122. Amendment of assessments.---(1) Subject to this section, the Commissioner may amend an assessment order treated as issued under section 120 or issued under section 121, or issued under section 59, 59-A, 62, 63 or 65 of the repealed Ordinance, by making such alternations or additions as the Commissioner considers necessary.

(2) An assessment order shall only be amended under subsection (1) within five years after the Commissioner has issued or is treated as having issued the assessment order on the taxpayer.

(3) Where a taxpayer furnishes a revised return under subsection (6) of section 114--

(a) the Commissioner shall be treated as having made an amended assessment of the taxable income and tax payable thereon as set out in the revised return; and

(b) the taxpayer's revised return shall be taken for all purposes of this Ordinance to be an amended assessment order issued to the taxpayer by the Commissioner on the day on which the revised return was furnished.

(4) Where an assessment order (hereinafter referred to as the "original assessment") has been amended under subsection (1) or (3), the Commissioner may further amend, as many times as may be necessary, the original assessment within the later of---

(a) five years after the Commissioner has issued or is treated as having issued the original assessment order to the taxpayer; or

(b) one year after the Commissioner has issued or is treated as having issued the amended assessment order to the taxpayer.

(4A) In respect of an assessment made under the repealed Ordinance, nothing contained in subsection (2) or, as the case may be, subsection (4) shall be so construed as to have extended or curtailed the time limit specified in section 65 of the aforesaid Ordinance in respect of an assessment order passed under that section and the time-limit specified in that section shall apply accordingly.

(5) 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 definite information acquired from an audit or otherwise, the Commissioner is satisfied that--

(i) any income chargeable to tax has escaped assessment; or

(ii) total income has been under-assessed, or assessment at too low a rate, or has been the subject of excessive relief or refund; or

(iii) any amount under a head of income has been misclassified.

(5A) Subject to subsection (9), the Commissioner may amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue.

(5B) Any amended assessment order under subsection (5A) may be passed within the time-limit specified in subsection (2) or subsection (4), as the case may be.

(6) As soon as possible after making an amended assessment under subsection (1), subsection (4) or subsection (5A), the Commissioner shall issue an amended assessment order to the taxpayer stating--

(a) the amended taxable income of the taxpayer;

(b) the amended amount of tax due;

(c) the amount of tax paid, if any; and

(d) the time, place, and manner of appealing the amended assessment.

(7) An amended assessment order shall be treated in all respects as an assessment order for the purposes of this Ordinance, other than for the purposes of subsection (1).

(8) For the purposes of this section, "definite information" includes information on sales or purchases of any goods made by the taxpayer, receipts of the taxpayer from services rendered or any other receipts that may be chargeable to tax under this Ordinance, and on the acquisition, possession or disposal of any money, asset, valuable article or investment made or expenditure incurred by the taxpayer.

(9) No assessment shall be amended, or further amended, under this section unless the taxpayer has been provided with an opportunity of being heard.

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;

(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 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 purposes of conducting an audit under that subsection.

10. Before we examine these sections it will be worthwhile to recapitulate the basic theme behind the repeal of 1979 Ordinance and the promulgation of 2001 Ordinance. The theme or concept was summarized in the following words:--

"Voluntarily compliance backed by strong audit"

and with this theme/concept in mind the legislature incorporated and promulgated the Income Tax Ordinance, 2001. The basis of the voluntary compliance and the trust the government has in the taxpayer has been incorporated in section 120 whereas the concept of audit and the procedure for selection of the cases have been outlined under section 177. Since the return becomes a deemed assessment order, therefore, to correct an erroneous order or an order in which definite information of concealment is available section 122 has been incorporated to amend such orders.

11. Now we will examine the contention of the learned counsel for the petitioner that in view of the fact that assessment order for tax year, 2005 deemed to have been under section 120 has already been amended under section 122 (5A), therefore, it cannot be selected for audit on the same points and for the same reasons. From a perusal of section 122(5A) it is seen that when on an examination of record the Commissioner reaches the conclusion that the order is erroneous in so far it is prejudicial to the interests of the revenue he can amend the order. Since the order passed under section 122(5A) is not before us we will just assume that on the basis of certain alleged errors, which according to him were prejudicial to the interests of the revenue, the Commissioner amended the deemed assessment order. The question whether the case falls within the ambit of section 122(5A) will be adjudicated by relevant appellate authorities and we will refrain from commenting on it. The only point which we would like emphasize on is that when a case is selected for audit for any reason whatsoever the procedure adopted for such audit is completely different from the procedure which has to be adopted for amending the order under section 122(5A). In our opinion, once a case is selected for audit it should be subjected to strong audit which means that the examination of the tax affairs of the person should be very minutely and carefully made and the discrepancies, if any, should be highlighted for the purposes of either confirming the order passed or taking action for the amendment of such order. In our opinion the fact that the order has been amended under section 122 should be the point in favour of selecting a case for audit instead of being treated as obstacle in the path for selection of case for audit because on the basis of amendment of order it can be safely assumed that the return which had been converted into an assessment order cannot be relied on. After carefully perusing the above reproduced provisions of law we have failed to come across any provision which bars the selection of case for audit under section 177 if for that same tax year action has already been taken under section 122. The learned counsel has also argued that case has been selected for audit almost for the same reasons on the basis of which action under section 122(5A) had been taken. We do not consider any need to examine the two notices for ascertaining the correctness of the statement of learned counsel because even if we assume that the reasons for selecting the case for audit are the same on the basis of which action was taken under section 122(5A), we would still be of the considered view that both the selection of the case for total audit and the action under section 122(5A) are different actions and there is no bar for initiating both the actions for the same tax year even on identical points.

12. Coming to the second argument of the learned counsel that subsection (1-A) which was introduced in the section 120 of the Income Tax Ordinance vide Finance Act, 2005 is applicable from the tax year, 2006 we have observed that the effect of the argument of the learned counsel is that cases where assessment order is deemed to have been passed under section 120 cannot be selected for audit for the tax years, 2003 to 2005. In our opinion, almost all the returns filed under the new Ordinance are converted into deemed orders under section 120 and therefore the overall effect will be that a vast majority of the cases for these three tax years will become entitled not to be selected for audit. This interpretation will thus render section 177 redundant and is, therefore, also against the concept behind the promulgation of the Ordinance which we have explained in the earlier part of this judgment. This cannot be the intention of the legislature and the first duty of the Courts is to arrive at the intention of the legislature and on basis arrive at the interpretation of the section. In the light of this observation we have examined subsection (1-A) of section 120 on which the learned counsel has placed reliance in support of his contention that cases which fall under subsection (1) of section 120, cannot be selected for audit under section 177 for the tax years, 2003-2005. It is our considered view that there was no need to incorporate this subsection as the law was very clear even before the introduction of this subsection that there was no bar under section 177 for selecting a person's tax affairs for audit even where his assessment had already been finalized under section 120(1) of the Income Tax Ordinance and therefore we are of the considered view that this subsection has been incorporated due to abundant caution on the part of the legislature and is in nature of an explanation and it is a trite law that the purpose of an explanation is to explain the effect and scope of a particular statute and the explanation unless the context otherwise demands is deemed to clarify the effect and scope of the statute from its inception. We have also considered the explanation given by the Central Board of Revenue vide paragraph 14 of the Circular No.1 of 2005, dated 5th June, 2005 which is reproduced below:--

(14) Selection for audit section 120(1A)

Law provides that where a taxpayer furnishes a complete return of income, it shall be taken for all purposes to be an assessment order issued by the Commissioner on the date the return was furnished.

In order to remove any doubts about the competence of the Commissioner to select a case for audit, subsection (IA) has been inserted in section 120 which empowers the Commissioner in this regard. This provision shall take effect from tax year, 2005.

13. It is seen that the Central Board of Revenue has also while explaining the purpose of incorporation of subsection (1-A) has stated that it was incorporated to remove any doubts. However, they have also stated in this paragraph that this provision shall take effect from tax year, 2005 which in our opinion is not the correct interpretation. So, while we agree with the first part of the paragraph 14 we are clear in our minds that the second part of the interpretation of the C.B.R. that it will be effective from the year, 2005 is not the correct interpretation and on the basis of the judgment of the Honourable Supreme Court in the case of Central Insurance Company quoted supra relied on by the learned counsel for the petitioner wherein it is held that C.B.R. does not figure in the hierarchy of the forum who have been entrusted the task of interpreting the statute and therefore its interpretation cannot be given biding effect, this interpretation is of no effect. While the above quoted judgment of the Honourable Supreme Court was followed by this Court in its judgment authored by one of us i.e. Muhammad Ather Saeed J. in the case of Premier Mercantile Services (Pvt.) Ltd. v. CIT (2007 PTD 2521) holding that if the C.B.R. has correctly interpreted a provision it cannot be rejected merely on the basis that such interpretation has been made by C.B.R.

14. We are, therefore, of the considered opinion that even before the Promulgation of subsection (1-A) of section 120 the Commissioner had the powers to select the cases which fall under the provisions of subsection (1) of section 120 for audit of their tax affairs and also that subsection (1-A) has retrospective effect. In light of our above opinion we hold that the impugned notice has been issued under exercise of Proper jurisdiction and authority by the respondent Commissioner.

15. The above are the reasons in support of our short order delivered in Court after hearing the learned counsel by which we had dismissed this petition along with listed application in limine.

16. However, before parting with this order we would like to observe that we have dismissed this petition only as we were not convinced by the arguments made by the learned counsel for the petitioner on the points enumerated above.

17. We have not examined the impugned notice in the context whether it falls within the parameters prescribed by various Courts including the Honourable Supreme Court of Pakistan for selection of cases for audit. We would, therefore, direct the respondent Commissioner to allow the petitioner to argue on all aspects of the case including but not restricted to the validity of the notice in the light of the parameters prescribed in section 177 and the judgments of the superior Courts before proceeding with the audit.

This petition is disposed of in the above manner.

S.A.K./N-11/KPetition disposed of.