MOHSIN RAZA VS CHAIRMAN, FEDERAL BOARD OF REVENUE
2009 P T D 1507
[Lahore High Court]
Before Irfan Qadir, J
MOHSIN RAZA
Versus
CHAIRMAN, FEDERAL BOARD OF REVENUE and others
Writ Petitions Nos. 4630, 4398, 4631, 4673, 4810, 4811, 5073, 5192, 5216, 5537, 5583, 5752, 5825, 5946, 5947, 5997, 6004, 6030, 6037, 6038, 6127, 6128, 6129, 6143, 6157, 6175, 6240, 6241, 6290, 6333, 6334, 6383, 6384, 6385, 6386, 6387, 6388, 6389, 6390, 6520, 6521, 6666, 6667, 6694, 6769, 6771, 6779, 6780, 6781, 6816, 6931, 6948, 6953, 7093, 7101, 7241, 7398, 7423, 7424, 7425, 7443, 7499, 7505, 7550, 7551, 7664 of 2009, 3667, 4022, 4200 and 4673 of 208, decided on 14/07/2009.
(a) Constitution of Pakistan (1973)---
----Art. 199---Income Tax Ordinance (XLIX of 2001), S. 177---Constitutional jurisdiction of High Court---Scope---Audit---Selection of petitioners' cases for audit with specific reference to S.177(4), Income Tax Ordinance, 2001---Roving inquiries and fishing expeditions and those too in violation of the statutory provisions not only cause the subject of such inquiry to become an "aggrieved person" but such a course of action was also violative of due process of law thereby entitling the aggrieved person not only to claim damages in a court of civil jurisdiction but also through invocation of constitutional jurisdiction---Petitioners had called in question the letters whereby their income tax affairs had been selected for audit on the ground that said letters of the department were violative of statutory provision viz. S.177 of the Income Tax Ordinance, 2001---Held: Question involved in the constitutional petitions was purely a legal question falling within the ambit of Art.199 of the Constitution and thus such constitutional petitions were maintainable.
Assistant Collector of Customs v. Khyber Electric Lamps and others 2001 SCMR 838 rel.
(b) Income Tax Ordinance (XLIX of 2001)---
----S. 177---Constitution of Pakistan (1973), Arts.199 & 25---Constitutional petition---Audit---Selection of cases for audit by Commissioner---Law and procedure analysed---Criteria, an essential pre-requisite---Commissioner of Income Tax could not select a case for audit, unless criteria provided had been duly fulfilled as laid down in terms of S.177(1) of the Income Tax Ordinance, 2001 by the Federal Board of Revenue because Commissioner could only select cases for audit in addition to selection for Audit referred to in S.177(2), Income Tax Ordinance, 2001 but he could not select cases for audit in substitution or in isolation thereof---Selection of cases in violation of such procedure was illegal---Prior notice to the assessee whose case was selected for audit, was of immense significance and absence thereof in such cases was sufficient to render the letters to the assesses by the department, about selection of cases for audit, to be devoid of any legal justification---High Court, in circumstances, accepted the constitutional petitions and the impugned orders passed by the Commissioner Income Tax (Audit) were declared to have been issued without lawful authority having no legal effect---Direction was issued by the High Court to the Federal Board of Revenue to lay down criteria in compliance with the mandate of S.177 of the Income Tax Ordinance, 2001 whereafter de novo proceedings be initiated with regard to the Income Tax affairs of such person who come within the purview of the said criteria while ensuring that persons similarly placed were treated alike in furtherance of Article 25 of the Constitution and selection of cases for audit on the basis of whimsical pick and choose at random resulting in discrimination ought to be avoided---Principles.
Clause (1) of section 177, Income Tax Ordinance, 2001 countenances that Central Board of Revenue (now Federal Board of Revenue) may lay down criteria for selection of any person for an audit of his income tax affairs by the Commissioner. It is clear that the competent authority to select a case for audit is the Commissioner whereas the criteria are to be laid down by the Central Board of Revenue. Clause (2) of section 177 makes it obligatory that Commissioner shall strictly follow the criteria laid down by the Central Board of Revenue (now Federal Board of Revenue) in selecting a person for audit. Reading clauses (1) and (2) together the word "may" appearing in clause (1) can have no other meaning except the word "shall" for the simple reason that if we read the same otherwise, then clause (2) of section 177 will be rendered redundant and Commissioner of Income Tax shall either not select a case for audit or if he selects a case for audit in the absence of such criteria, clause (2) of section 177 will be rendered meaningless, ineffective and futile. Unless and until such criteria are laid down by the Central Board .of Revenue the scheme of section 177 shall remain incomplete and Commissioner will have no guidelines for selection of cases for audit.
The confidentiality of criteria cannot be stretched to mean absence thereof or the scope of this secrecy can be enlarged to an extreme degree of absolving the Federal Board of Revenue from laying down the criteria in question. In the absence of such criteria, the issue of its confidentiality would not arise. If the criteria are to remain confidential from all concerned including the persons to be subjected to the same then such non-disclosure of criteria in itself would nullify the basic object and purpose for which subsections (1) and (2) have been enacted.
In the absence of the said criteria which are essentially vital and relevant for the selection of cases by Commissioner, any audit would be rendered violative of the letter and spirit of section 177 of the Income Tax Ordinance, 2001. It was contended that the selection for audit had been made by Commissioner under clause (d) of subsection (4) of section 177. This argument with specific reference to clause (d) is not well founded because clause (d) makes no mention of the person to be selected for audit, rather, it refers to any other matter which in the opinion of the Commissioner is to be taken into account for determination of correct income of the persons selected for audit under subsection (4) having regard to persons mentioned in clauses (a), (b) and (c) especially when the word `person' has been expressly excluded from clause (d) by the legislature in its wisdom. There is no denying the fact that Commissioner under subsection (4) has been empowered to select cases of only those persons [in addition to persons enumerated in subsections (1) and (2)] who are specifically mentioned in clauses (a), (b) or (c) of subsection (4) while taking such matters into consideration which, in the opinion of the Commissioner, are material for determination of correct income.
In the present cases, as regards the impugned selection for audit, neither any reference is made to the criteria envisaged in subsection (1) nor to the persons mentioned in clauses (a), (b) and (c) of subsection (4). Besides, the Commissioner has not formed any opinion qua the material for the determination of correct income in terms of clause (d).
There was yet another contention that in selection of cases of persons for audit, clause (d) of section 177(4) can be invoked independently of all the preceding clauses and subsections of section 177. In order to comprehend the true scope of sub-clause (d) of section 177(4) a careful scrutiny of the same needs to be done. Sub-clause (d) has direct nexus to subsection (4) of section 177. In fact sub-clause (d) is controlled by clause (4) of section 177. According to sub clause (d) the Commissioner may also select a person for an audit of the person's income tax affairs having regard to any other matter, which, in the opinion of the Commissioner, is material for determination of correct income. In other words the Commissioner has to form an opinion by identifying other matters which will enable him to determine the correct income prior to selection of a person for an audit of his income tax affairs. Such opinion cannot be formed unless the Commissioner arrives at a definite conclusion that the income declared by such person is incorrect. The requirement of formation of opinion in itself suggests that opinion must be based on cogent reasons and not on pick and choose. In the present cases, the Commissioner has not made any determination that the income declared by the assessees was incorrect. The Commissioner has merely proceeded to select cases at random by simply mentioning in his notice certain matters which, according to the Commissioner, may be material for audit purposes but the same is completely silent respecting any nexus or relevance to the determination of correct income. In all the impugned notices issued under clause (d) of section 177(4), there is not even the slightest hint that the income declared by assessees was not correct especially when the Commissioner should have formed an opinion qua the incorrectness of income declared before resorting to clause (d) wherein it is further binding on the Commissioner to furnish opinion as regards any other matter which is relevant for the determination of correct income of the person enumerated in clauses (a), (b) and (c) of subsection (4) of section 177.
A comparison of section 177 as it stood prior to the substitution of the new section by the Finance Act, 2004 and the amended section 177 as it presently stands will make it clear that the relatively wider or seemingly unbridled discretion available earlier to the Commissioner as regards the selection of any person for an audit of his income tax affairs is no longer available to him now.
If the old and new section 177 are placed in juxtaposition it becomes unambiguously clear that subsection (1) of earlier section 177 has been materially altered. In the earlier subsection (1) no limitations were placed on the authority of the Commissioner to select person's case for audit of his income tax affairs. However in the amended section the Commissioner can only invoke clause (d) after fulfillment of the following conditions:--
(i) The Commissioner can select a person for audit in accordance with the criteria laid down by the Board under subsection (1).
(ii) The persons' history for compliance or non compliance with this Ordinance.
(iii) The amount of tax payable by the person.
(iv) The class of business conducted by the person.
The four conditions mentioned above are essential pre-requisites provided by subsection (4) of amended section 177 of the Income Tax Ordinance, 2001. It is clear from the introductory word of subsection (4) that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of his income tax affairs. The words "in addition to" do not mean in substitution to or in isolation of or that these words can by any stretch of imagination be construed to absolve the Federal Board of Revenue from laying down the criteria or the Commissioner from adhering to the same having regard to clauses (1) and (2) of section 177 of the Income Tax Ordinance, 2001.
Perusal of the impugned letters would show that in all of these letters no reasons what-so-ever have been mentioned as to why the petitioner's case was selected for audit except that in some of the cases It is mentioned that all the declared expenses seem to be inflated and require verification with regard to their admissibility and genuineness in terms of section 21 of Income Tax Ordinance, 2001. As regards other impugned orders no reason what-so-ever has been mentioned qua the selection of case for audit. Even if the contents of these notices for the sake of argument is taken to be the material relevant for the determination of correct income, the same has no nexus to the contents enumerated in the preceding sub clauses of subsection (4) of section 177 or the other preceding clauses of section 177. (If clause (d) of sub-section (4) is to be interpreted in isolation of the remaining provisions of the same even then the opinion of Commissioner envisaged in clause (d) of subsection (4) of section 177 of Income Tax Ordinance is non-existent. Any opinion formed in violation of section 24-A of the General Clauses Act is no opinion in the eye of law).
Of course clause (d) of subsection (4) will not apply in isolation of the preceding clauses or sub-sections of section 177 in as much as clause (d) is to apply in addition to such preceding clauses. Even if the court had agreed with the argument that clause (d) confers independent power upon the Commissioner to select a person for audit the latter is by no means absolved of forming an opinion that the matters enumerated in the impugned letters are necessary for determination of correct income. Such opinion cannot be formed unless the Commissioner concludes on the basis of valid grounds that the income declared by the person concerned is incorrect. Once such a conclusion is reached the Commissioner is then required to form an opinion as regards the matters which are relevant and necessary for the computation or determination of correct income. In none of the impugned letters or even in the parawise comments furnished by the department any opinion has been formed qua incorrectness of the income declared by the assessees or as regards the matters which, according to the Commissioner, are material for the determination of correct income. Mere mention of such matters in the absence of formation of opinion that such matters are also material for determination of correct income, is not enough. The formation of an opinion qua relevance' of such matters vis-a-vis the determination of correct income is undoubtedly an essential condition of sub-clause (d) of clause (4) of section 177 of the Income Tax Ordinance, 2001 even if this sub clause is read in isolation of its preceding clauses.
Laying down of criteria for selection of any person for his income tax affairs in terms of subsection (1) of section 177 is an essential pre-requisite for the Commissioner to select a person for audit. Once the Commissioner has selected a case for audit in accordance with the criteria laid down by the Central Board of Revenue in terms of clause (1) of section 177 then additionally, the Commissioner can also select a person for an audit of the person's Income Tax affairs having regard to the factors enumerated in clauses (a), (b) and (c) of sub-section (4) of section 177. It would be seen that subsection (4) will come into play only when the Commissioner, in the course of proceeding with the audit of a person under subsection (2) of section 177 discovers that in addition to the selection of person in subsection (2) the Commissioner now requires to select another person for audit of Income Tax affairs. This is exactly what is envisaged in subsection (4) of section 177 wherein it is clearly mentioned that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of income tax affairs. As such subsection (4) of section 177 is secondary in character in relation to subsections (1) and (2). It therefore follows that if subsection (4) is not capable of being isolated from subsections (1) and (2), then clause (d) of subsection (4) cannot also be detached from its preceding clauses or subsections.
Different clauses of section 177 are inter related and the sequence or order in which these have been mentioned by the Legislature in its wisdom must be observed by the executive authorities in letter and spirit as an obligation since each clause augments the other. Clause (d) of subsection (4) of section 177 cannot be isolated from its preceding clauses or subsections in a manner that primary part of section 177 becomes redundant in view of such isolation thereby paralyzing the main body of the provision in question in order to make the residual or secondary clause extra potent.
The question as regards the issuance of a notice prior to the selection of a case for audit, section 177 of the Income Tax Ordinance is completely silent on this aspect. Similar was the position with regard to section 177 of the Income Tax Ordinance 2001 prior to the coming into force of Finance Act 2004. Before proceeding with the audit of an assessee, a prior notice is an essential requirement since audit of person's income tax affairs results in prejudice being caused to the assessee, who becomes subjected to scrutiny and that the return filed by him is re-opened.
It is, therefore, not correct to contend that the impugned letters are not prejudicial to the interests of the assessees. The selection of a case for audit in itself is tantamount to an adverse order since it undermines the sanctity of an assessment order issued by the Commissioner of Income Tax in terms of clause (b) of subsection (1) of section 120 of the Income Tax Ordinance, 2001. An adverse order made without affording an opportunity of personal hearing is to be treated as a void order. The principles of audi alteram partem in particular are to be read into every statute.
Prior notice to the assessees qua selection of their cases for audit is of immense significance and the absence thereof in the cases in question is sufficient to render the impugned letters to be devoid of any legal justification.
Commissioner of Income Tax cannot select a case for audit under clause (d) of subsection (4) of section 177 of the Income Tax Ordinance, 2001 unless criteria provided has been duly laid down in terms of subsection (1) of section 177 by the Federal Board of Revenue, because Commissioner can only select cases for audit in addition to selection of audit referred to in subsection (2) of section 177 but he cannot select cases for audit in substitution or in isolation thereof. The import of the words "in addition to appearing at the beginning of subsection (4) of section 177 of the Income Tax Ordinance, 2001 is significant.
The words "in addition to" mean moreover, additionally, also. In the context of section 177 of the Income Tax Ordinance, 2001 or otherwise these words convey that something is to be done moreover or additionally with reference to that thing which is being done prior thereto. These words have a tilt towards something other than the usual. In these words there is a tinge of something which is relatively exceptional or which is in contradistinction to what is usually or generally to be accomplished in routine. To the contrary the Commissioner of Income Tax is not selecting cases for audit in addition to the selection referred to in subsection (2) of section 177 but in fact the Commissioner is selecting these cases as a matter of routine because scores of cases have been picked up by the Commissioner under clause (d) of subsection (4) of section 177 but not a single case has been selected by him in terms of the selection referred to in subsection (2) of section 177. The impugned selection of cases on this score alone is illegal.
All the writ petitions were accepted by the High Court and the impugned orders passed by the Commissioner Income Tax (Audit) were declared to have been issued without lawful authority and as such the same were of no legal effect. Consequently a direction was issued to the Federal Board of Revenue to lay down a criteria in compliance with the mandate of section 177 of the Income Tax Ordinance 2001 whereafter de novo proceedings be initiated with regard to the income tax affairs of such persons who come within the purview of the said criteria while ensuring that persons similarly placed were treated alike in furtherance of Article 25 of the Constitution of Islamic Republic of Pakistan, 1973 and selection of cases for audit on the basis of whimsical pick and choose at random resulting in discrimination ought to be avoided.
1998 SCMR 2268; 1997 SCMR 1804; Commissioner of Income Tax and others v. Fatima Sharif Textile Mills Kasur and others 2009 SCMR 344 = 2009 PTD 37; Muhammad Hussain's case 2005 PTD 152; PLD 2002 SC 630; 2007 SCMR 1367 = 2007 PTD 1656; 2007 PTD 1800; 2009 PTD 284; 2008 PTD 1440; 2006 PSC 9; 1991 PTD 968; PLD 1997 SC 582; PLD 1976 Lah. 1626 = 1976 PTD 347; 1978 67 ITR 11; 1995 PTD 393; 2000 SCMR,1017; Assistant Collector of Customs v. Khyber Electric Lamps and others 2001 SCMR 838; PLD 2008 SC 663; 2007 SCMR 330; 2005 SCMR 678; 2005 SCMR 1814 and PLD 2004 SC 441 ref.
Syed Ali Imran Rizvi, Dr. Ilyas Zafar, Shahbaz Butt, Tahir Mehmood Butt, Aamer Umer Khan, Asghar Ahmad Khan Kharal, Siraj -ud-Din Khalid, -Inam-ul-Haq, Yunus Khalid, Mian Mehmood Rashid, Nadeem, Ch. Mumtaz-ul-Hassan, Ikram-ul-Haq, Muhammad Arif Malhi, Tariq Saleem, Rana Muhammad Afzal, Muhammad Ajmal Khan, Sajid Ijaz Hotiana for Petitioner.
Muhammad Ilyas Khan and Abdul Razzaq Raja, Deputy Attorney General for Respondents.
Tahir Mehmood Khokhar, Shahid Jamil Khan and Mian Yousaf Umer for Department.
Date of hearing: 24th April, 2009.
JUDGMENT
IRFAN QADIR, J.---These are Writ Petitions Nos. 4398/09, 4630/09, 4631/09, 4673/09, 4810/09, 4811/09, 5073/09, 5192/09, 5216/09, 5537/09, 5583/09, 5752/09, 5825/09, 5946/09, 5947/09, 5997/09, 6004/09, 6030/09, 6037/09, 6038/09, 6127/09, 6128/09, 6129/09, 6143/09, 6157/09, 6175/09, 6240/09, 6241/09, 6290/09, 6333/09, 6334/09, 6383/09, 6384/09, 6385/09, 6386/09, 6387/09, 6388/09, 6389/09, 6390/09, 6520/09, 6521/09, 6666/09, 6667/09, 6694/09, 6769/09, 6771/09, 6779/09, 6780/09, 6781/09, 6816/09, 6931/09, 6948/09, 6953/09, 7093/09, 7101/09, 7241/09, 7398/09, 7423/09, 7424/09, 7425/09, 7443/09, 7499/09, 7505/09, 7550/09, 7551/09, 7664/09, 3667/08, 4022/08, 4200/08 and 4673/08. All these writ petitions call in question the orders of Commissioner Income Tax whereby income tax affairs of all these petitioners were selected for audit under section 177(4)(d) of the Income Tax Ordinance, 2001. As common questions of law arise in these cases, these are being disposed of by this single judgment.
2. The facts which are essentially germane to all these cases are that the petitioners are tax payers within the meaning of section 2(66) of the Income Tax Ordinance 2001 and are duly registered with the respondents having a distinct national tax number. They furnished income tax returns under section 114 of the Ordinance for the tax year 2008 and their returns were treated to be an assessment order issued by the Commissioner of Income Tax in terms of section 120 of the Income Tax Ordinance, 2001 on the date on which each return was submitted. Subsequently letters were issued to all the petitioners whereby the Commissioner of Income Tax (Audit) selected the cases of the petitioners for audit with specific reference to subsection (4) of section 177 of the Ordinance.
3. Aggrieved by the initiation of audit proceedings all these petitioners filed the instant writ petitions wherein the legality of orders of selection of their cases for audit under section 177(4) has been assailed on a number of grounds. Most of the learned counsel appearing for the writ petitioners have addressed separate arguments in support of these petitions. These arguments are accordingly being taken up in the sequence in which the learned counsel appeared.
4. Dr. Ilyas Zafar, Advocate Supreme Court appearing in Writ Petition No. 7107 of 2009 stated that in the current year the petitioner declared more income than the previous year i.e. Rs.150 million as against the previous years income of Rs.139 million. Correspondingly the total turns over also increased from 1647 million of the preceding year to 2165 million of this year. A deemed assessment order was accordingly passed but the notice envisaged under section 114(2) of the Income Tax Ordinance for any deficiency for the return was not issued. Likewise without complying with the requirement of section 120(3) no notice qua an incorrect entry in the return was served as per law. Dr. Ilyas Zafar, Advocate maintained that, since the return of the petitioner was not treated as invalid under section 120(4) of the Income Tax Ordinance, the selection of petitioner's case for audit was in itself against the spirit of the Income Tax Ordinance. Dr. Ilyas Zafar Advocate argued that section 177 of the Income Tax Ordinance is violative of Articles 2-A and 25 of the Constitution for which he has placed reliance on the following judgments of the Supreme Court of Pakistan:--
1998 SCMR 2268.
1997 SCMR 1804 (relevant page 1810).
5. Learned counsel while laying emphasis on Article 4 of the Constitution argued that section 177 of the Income Tax Ordinance in itself runs counter to the concept of due process of law since the said provision in no way provides guidelines for structuring of discretionary powers in an open and transparent manner. Any provision which confers unbridled discretion is to be considered inconsistent with Article 4 of the Constitution. Reliance in this regard is placed on:--
2005 PTD 152
2009 SCMR 344 = 2009 PTD 37
6. Additionally; it is argued that (i) there is an apparent conflict between sections 177 and 120 of the. Income Tax Ordinance in as much as an order of deemed assessment under section 120 can be changed at the whims of the respondent under section 177. In other words with the invocation of section 177 the deemed assessment ceases to be a deemed assessment and thus the sanctity of an assessment in the year in which it is passed by the authorities is completely eroded. Besides, the operations, of a corporate entity are adversely affected especially in the case of the present petitioners who remain constantly disturbed by the frequent visits to their factory premises of the officials of the taxation authorities seeking undue explanations notwithstanding the fact that all the relevant account books and the entire record pertaining to Income Tax affairs had been handed over to the taxation authorities.
7. Mr. Tahir Mehmood Butt, Advocate appearing as counsel in Writ Petition No. 4811 of 2009 relying on Muhammad Hussain's case stated that while selecting the case for audit under the old section 177, the Lahore High Court held the same to be null and void as a result of which section 177 was amended by the legislature. The background in which section 177 was amended is to he gathered from the judgment rendered by this court in Muhammad Hussain's case. The whole idea of the amendment was to take away the powers of, the Commissioner and vest the same in the Federal Board of Revenue. Mr. Tahir Mehmood Butt, laid emphasis on the background in which the powers earlier granted to Commissioner vide section 177(I) had been taken away to contend that in this peculiar backdrop the real essence of the amended section 177 of the Income Tax Ordinance is to be gathered. Neither the Commissioner has issued any criteria whatsoever for the selection of cases for audit nor has the same been issued by the Federal Board of Revenue. According to him confidentiality of the criteria envisaged in subsection (3) of section 1.77 can by no stretch of imagination be interpreted to mean the absence of criteria or that such criterion is in any way to be kept confidential even from the tax payer. Learned counsel contends that sub-clause (4) of section 177 cannot be invoked in the absence of any criteria laid down by the Federal Board of Revenue. This section provides a complete procedure for carrying out audits and the same has to be followed in letter and spirit keeping in view the sequence in which things are to be accomplished in terms of the four subsections of section 177. Even if the sequence is to be followed clause (4) of section 177 is still to be applied sparingly and in exceptional circumstances because it is to be resorted to in addition to the criteria " laid down in sub-clauses (1) and (2) and not in substitution thereof. In other words sub-clause (4) will only come into play if criteria laid down in the preceding sub-clause are practically rendered ineffective owing to certain peculiar or exceptional circumstances. The impugned audit clearly suggest that present section 177 of the Income Tax Ordinance, is being applied in the manner in which the un-amended section 177 was being applied by the department itself. In other words section 177 as it now stands makes it crystal clear that what was being done through various circulars in the light of section 59 of the previous Income Tax Ordinance is still being done presently. If the intention of legislature had been to bypass sub-clauses (1), (2) and (3) then instead of using the words "in addition to" in subsection (4) the word "notwithstanding" could have been used. The reasons mentioned in the impugned selection of case for audit at Annexure "B" of the writ petition are extraneous to the grounds mentioned in sub-clauses (a) to (d) of subsection (4) of section 177 of Income Tax Ordinance 2001. It has been held in the case of Muhammad Hussain that reasons for selection of case should be subsequently mentioned with reference to the relevant sub-clause of subsection (4) of section 177. It is next argued that the powers exercised by the Commissioner in the cases of the petitioners have not been exercised reasonably, justly and fairly in as much as the petitioners cases have been selected for audit on the ground that expenses appeared to be inflated. This ground is not a valid ground under section 177 of the Income Tax Ordinance: Reliance is placed on:-
PLD 2002 SC 630 (relevant page is 640 para F).
2007 SCMR 1367 = 2007 PTD 1656.
2007 PTD 1800.
8. Mr. Siraj-ud-Din Khalid, Advocate in Writ Petition No.6816 of 2009 states that the words `in addition to' appearing in subsection (4) as per its legal meaning would not mean `in lieu of'. Under section 177, the selection is to be of the income tax affairs of a person and not of income tax return. Reliance is placed on 2009 PTD 284. He contends that once audit takes place of income tax affairs then there is no need or requirement to carry out an audit again. The petitioner contends that in his case i.e. W.P. No. 6127 of 2009 the income tax affairs have already been audited and regarding the same affairs now a fresh notice qua its selection has been issued. According to the learned counsel once an audit has been concluded the same cannot be re-audited because there is no provision in Income Tax Ordinance for re-audit. Relying on 2008 PTD 1440 it is contended that selection cannot be made after the end of the financial year in which the income tax return was filed since section 177(7) prohibits more than one audit in a year. Year means `year' as defined in General Clauses Act since there is no definition of word year in the Income Tax Ordinance). Relying on 2005 PTD 152 read with Supreme Court case reported as 2009 PTD 37 the learned counsel contends that before selection of a case for audit the opportunity of being heard is mandatory. He further states that subsection (4) is unreasonable and vague and hence unconstitutional. Reliance is placed on 2006 PSC 9.
9. Mian Ashiq Hussain, Advocate in W.Ps. Nos. 5073, 6241, 6240 of 2009 contends that no case can be selected without objective criteria because subjective selection is always arbitrary and the same is inconsistent with the rule of law. Reliance is placed on:-
1991 PTD 968.
PLD 1997 SC 582 (relevant portion at page 670 ).
1976 34 Tax 31 (Lahore)
1978 67 ITR 11 (SC India)
10. He states that according to section 120(3) of the Income Tax Ordinance the deficiency in documents is to be covered up in terms of said section and the same cannot be bypassed by seeking refuge in section 177. In order to circumvent the limitation provided in section 120(6) the respondents have resorted to section 177 which is against the basic spirit of the enactment. In fact a general provision is being made to supersede a special provision, which cannot be done.
11. Mr. Shahbaz Butt, Advocate has dilated upon the change in the tax policy in the preceding years when the country has switched over from the culture of suspicion to tax payer friendly approach. In support of these arguments it is stated that in the Income Tax Ordinance, 1979 there was only one taxpayer friendly provision and that was section 59 thereof. According to him section 177 of the Income Tax Ordinance is to be viewed in the light of these changing trends and keeping in view the ethos of the present Income Tax Ordinance. He says that there is an obligation on the Commissioner to exercise the discretion vesting in him in terms of clause (d) of subsection (4) of section 177 of Income Tax Ordinance judiciously and reasonably while selecting a case for audit. Such exercise of discretion is lacking in the instant case. The learned counsel submits that about 359 cases were selected in just one day i.e. on 20-1-2009 by brushing aside all the sub-sections and clauses of section 177 of the Income Tax Ordinance against all norms of reasonableness and due process of law.
12. Mr. Muhammad Ilyas Khan, Senior Advocate Supreme Court of Pakistan counsel for respondent/department has raised a preliminary objection that these petitions are premature and are thus not maintainable. It is stated that no adverse order has so far been passed and the eventual outcome of the audit can also be in favour of the petitioners. The petitioners have approached this court merely on anticipation as if the matter is going to be decided against them. The petitioners could have filed these writ petitions in case any adverse action had been taken for which complete procedure is available, in which case prior notices are to be issued under section 120 of the Income Tax Ordinance in which proper opportunity is then to be afforded to the petitioners whereafter amended assessment can be made under section 122 of the Income Tax Ordinance. Reliance in this regard is placed on 1995 Taxation 211 LHC (relevant para 17), 2000 SCMR 1017.
13. It is contended that different clauses of section 177 are independent of each other especially because of the word "also" appearing after the words "in addition to" in clause (4) of the said section. It is further contended that the words Income Tax affairs in clause (4) include any affair of Income Tax irrespective of constraints of time. Likewise it is contended that clause (d) of subsection (4) is also independent of the preceding clauses namely (a), (b) and (c). The very spirit behind the tax friendly provisions of the Income Tax Ordinance is to facilitate the taxpayers to be truthful in filing their returns and conducting their income tax affairs qua which a solemn declaration is also filed as a part of the Income Tax return and in this background the department is well within its right to ensure as to whether the taxpayers are adhering to the declaration furnished by them or not and section 177 is therefore a means of discovering as to whether' the declarations have been filed in a bona fide manner or not and if the tax payer proves that the return has been filed as per the declaration then the audit would be dropped. If the declaration is incorrect then any fraudulent declaration 'would vitiate the assessment. It is further contended that the word income tax affairs for the first time has been used in the Income Tax Ordinance 2001 prior to which this term was never used in earlier laws on the subject and the word Income Tax affairs is wide enough to include the expenditure, profits, over all turn over, sales, costs and liabilities or anything having nexus with income tax affairs. The selection of income tax affairs can be done in a two fold manner firstly on the guidelines of the Board, and secondly by the Commissioner himself subject to his own opinion or subject to the opinion formed by Commissioner in terms of subsection (4). It has been so held in I.C.A. No. 125 in Writ Petition No. 1272 of 2000 and 94 Taxation 317 SC (relevant Para 3). In Fatima Sharif case Supreme Court of Pakistan expunged last three lines of paragraph 7 and paragraph 8 in totality of Muhammad Hussain's case. The manner and. the procedure in which notice under section 177 is now to be given has been settled in Fatima Sharif's case and impugned notices in all these cases are in consonance with the criteria mentioned in the said case.
14. It has further been emphasized by Mr. Muhammad Ilyas Khan, that matters pertaining to business loss, allocation of expenses, decline in sales etc. are not to be gone, into in constitutional jurisdiction since the same is tantamount to gag the process and proceedings contemplated under the Income Tax Ordinance. (Reliance is placed on the same judgment of Division Bench). According to Mr. Muhammad Ilyas Khan, all these judgments including ICA judgment referred to above clearly suggest that the Commissioner of Income Tax independently of other subsections and clauses of section 177 can select matters which are required to be audited. It has also been contended that clause (4) being independent of the preceding clauses or subsections, empower the Commissioner even in the absence of criteria to select cases for audit (reliance is placed on the same judgment of ICA). It is further asserted that the deficiencies in Income Tax return are to be removed or rectified under section 120(6) whereas the income tax affairs are to be audited under a separate section which is 177 and section 177 to that extent is independent of income tax return. Even if those deficiencies have been completed, even then selection of audit is totally independent and these provisions are completely separate and provide for separate situations.
15. Learned Deputy Attorney General while adopting the arguments of Mr. Muhammad Ilyas Khan, Advocate, additionally contends in response to the arguments advanced by learned counsel for the petitioners that the non-obstante clause of section 120 confers overriding powers upon the Commissioner of Income Tax to carry out the audit of Income Tax affairs notwithstanding the provision of subsection (1) of section 120. The learned Deputy Attorney General has further argued that the petitioners have not approached the court with clean hands otherwise they would never have filed the instant writ petitions since the only, apprehension which the petitioners have is with regard to their incorrect declarations which they want to hide and writ is not to be issued in favour of someone who attempts to camouflage some wrong doing.
16. Mr. Shahid Jamil Khan, Advocate has essentially adopted the arguments of Mr. Muhammad Ilyas Khan, Advocate. He however contends that no criteria has been laid down by the Federal Board of Revenue and clause (d) of subsection (4) of section 177 of Income Tax Ordinance, 2001 has no nexus with the said criteria. According to him clause (d) deals with altogether a different situation and the impact of the same is to be viewed in a different context. He has also argued that any criteria contained in section 177 is to be laid down in exceptional circumstances whereas powers of Commissioner under clause 4(d) are to be exercised in routine or generally without any reference to the said criteria. He further said that in the presence of criteria there is no question of any discretion being exercised by the Commissioner except that there is a clear distinction between subsections (3) and (4) of section 177. He argued that Commissioner is to form an opinion in terms of clause (d) of subsection (4) and the formation of opinion is the sole discretion of Commissioner. Learned counsel has emphasized that clause (d) of subsection (4) is totally independent from all the preceding clauses and subsections of section 177. Lastly the learned counsel in support of his submissions has relied on Fatima Sharif's case supra.
17. In rebuttal Mr. Ali Imran Rizvi and Mr. Shahbaz Butt, Advocates maintain that the case law relied upon by Mr. Muhammad Ilyas Khan, learned counsel for respondent department, as well as learned Deputy Attorney General is not applicable to the facts and circumstances of the present cases since the said case law pertain to selection of audit under section 177 for the tax year 2003. At that time, according to them section 177 of the Income Tax Ordinance was materially different and after the substitution of the new section 177 by the Finance Act, 2004 the said section of the Income Tax Ordinance has undergone a considerable change and the ingredients of the amended section 177 are altogether different from the previous section.
18. After hearing the learned counsel for the parties, this court at the very outset propose to deal with a preliminary objection that has been raised by Mr. Muhammad Ilyas Khan, Advocate that selection of a case for audit, in itself, has not given any cause of action to the writ petitioners in view of the fact, that, no adverse order has hitherto been passed against the petitioners and at this stage in the absence of any final order passed, the eventual outcome of the audit can also be favourable to the petitioners. According to Mr. Muhammad Ilyas Khan, the petitioners are only anticipating a grievance, which may or may not mature. The learned counsel contends that this Court will not exercise writ jurisdiction on an anticipatory cause of action or on a mere apprehension that eventual outcome may not be very favourable qua the interests of a prospectively aggrieved person. Mr. Muhammad Ilyas Khan maintains that as and when an adverse order will be passed in pursuance of the audit being conducted by department in terms of section 177 of the Income Tax Ordinance, 1991, there are ample remedies provided to the aggrieved.
19. Dr. Ilyas Zafar in his arguments with regard to Writ Petition No.7101 of 2009 has furnished an answer to this preliminary objection by stating that notwithstanding the fact that all the relevant accounts and the entire record have been handed over to the Taxation Authorities yet their frequent visits to the factory premises seeking impertinent explanations is adversely affecting focus of the management from achieving their commercial targets.
20. At this juncture this court may observe that it is well settled proposition of law that roving inquiries and fishing expeditions and that too in violation of the statutory provisions not only cause the subject of such inquiry to become an aggrieved person but such a course of action is also violative of due process of law thereby entitling the aggrieved not only to claim damages in a Court of civil jurisdiction but the same also entitles him to agitate his grievance through invocation of writ jurisdiction. The answer to question whether the impugned selection of cases for audit is within the four-corners of law or not, will determine the issue of maintainability of the writ petitions. All the aforesaid writ petitions call in question the impugned letters whereby their income tax affairs have been selected for audit on the ground that these impugned letters are violative of statutory provision viz. section 177 of Income Tax .Ordinance, 2001. The question involved in these writ petitions is purely a legal question falling within the ambit of Article 199 of the Constitution and as such the preliminary objection raised by Mr. Muhammad Ilyas Khan, as to the maintainability of these writ petitions is not very convincing. Reliance in this regard is placed on a judgment rendered by the Supreme Court of Pakistan in the case of "Assistant Collector of Customs v. Khyber Electric Lamps etc.," reported as 2001 SCMR 838 wherein it was held by the august Supreme Court that writ petition was maintainable where a notice issued to the petitioner did not contain specific particulars relating to the provisions of law under which the same was issued.
21. In order to determine the legality of impugned selection of income tax affairs of the petitioners by the Commissioner under section 177 of the Income Tax Ordinance, 2001 a thorough analysis of the said provision is required. This section reads as under:---
"177. Audit.---(1) The Central Board of Revenue, 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 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 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 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 that subsection."
22. Clause (1) of the aforesaid section countenances that Central Board of Revenue (now Federal Board of Revenue) may lay down criteria for selection of any person for an audit of his income tax affairs by the Commissioner. It is clear that the competent authority to select a case for audit is the Commissioner whereas the criteria are to be laid down by the Central Board of Revenue. Clause (2) of section 177 makes it obligatory that Commissioner shall strictly follow the criteria laid down by the Central Board of Revenue (now Federal Board of Revenue) in selecting a person for audit. Reading clauses (1) and (2) together the word "may" appearing in clause (1) can have no other meaning except the word "shall" for the simple reason that if we read the same otherwise then clause (2) of section 177 will be rendered redundant and Commissioner of Income Tax shall either not select a case for audit or if he selects a case for audit in the absence of such criteria, clause (2) of section 177 will be rendered meaningless, ineffective and futile. Unless and until such criteria are laid down by the Central Board of Revenue the scheme of section 177 shall remain incomplete and Commissioner will have no guidelines for selection of cases for audit.
23. It has been argued by Mr. Tahir Mehmood Butt on behalf of the petitioners that confidentiality of criteria envisaged in subsection (3) of section 177 would not mean the absence of criteria or that the said criteria are to be kept confidential from the tax payer. On the other hand it is stated by Mr. Shahid Jamil Khan, Advocate for respondents that no criteria has been laid down by the Board and even otherwise it is the discretion of the latter to lay down the criteria or not. This court is not in agreement with the contention of the learned counsel for the respondent department. Surely, the confidentiality of criteria cannot be stretched to mean absence thereof or the scope of this secrecy can be enlarged to an extreme degree of absolving the Federal Board of Revenue from laying down the criteria in question. However in the context of present case, the question of constitutionality of keeping the criteria confidential is not relevant in view of the admission of the respondents that no criteria has been laid down by the Federal Board of Revenue. In the absence of such criteria, the issue of its confidentiality would not arise. It may however be observed that if the criteria are to remain confidential from all concerned including the persons to be subjected to the same then such nondisclosure of criteria in itself would nullify the basic object and purpose for which subsections (1) and (2) have been enacted. This court would not like to dilate on this issue further especially when it is nobody's case that any criteria has been laid down in this regard by the Federal Board of Revenue. Most of the learned counsel (except some) have rightly not responded to the constitutionality of the aforesaid issue of confidentiality because in the present circumstances this issue is of purely academic nature.
24. As far as facts of the present case go, it is an admitted position that till date no criteria in this regard has been laid down by the Central Board of Revenue. Therefore, in the absence of the said criteria which is essentially vital and relevant for the selection of cases: by Commissioner, any audit would be rendered violative of the letter and spirit of section 177 of the Income Tax Ordinance 2001. It has been contended by Mr. Ilyas Khan that the instant selection for audit has been made by Commissioner under clause (d) of subsection (4) of section 177. This argument of Mr. Ilyas Khan with specific reference to clause (d) is not well founded because clause (d) makes no mention of the person to be selected for audit, rather, it refers to any other matter which in the opinion of the Commissioner is to be taken into account for determination of correct income of the persons selected for audit under subsection (4) having regard to persons mentioned in clauses (a), (b) and (c) especially when the word `person' has been expressly excluded from clause (d) by the legislature in its wisdom. There is no denying the fact that Commissioner under subsection (4) has been empowered to select cases of only those persons [in addition to persons enumerated in subsections (1) and (2) who are specifically mentioned in clauses (a), (b) or (c) of subsection (4) while taking such matters into consideration which in the opinion of the Commissioner are material for determination of correct income.
25. In all the cases before this court as regards the impugned selection for audit neither any reference is made to the criteria envisaged in subsection (1) nor to the persons mentioned in clauses (a), (b) and (c) of subsection (4). Besides, the Commissioner has not formed any opinion qua the material for the determination of correct income in terms of clause (d).
26. Learned counsel for the department viz. Mr. Muhammad Ilyas Khan, Advocate as well as learned Deputy Attorney General have heavily relied upon section 177 (4)(d) of the Income Tax Ordinance, 2001. According to them in selection of cases of persons for audit, clause (d) of section 177(4) can be invoked independently of all the preceding clauses and subsections of section 177. In order to comprehend the true scope of sub-clause (d) of section 177(4) a careful scrutiny of the same needs to be done. Sub-clause (d) has direct nexus to section 4 of section 177. In fact sub-clause (d) is controlled by clause (4) of section 177. According to sub clause (d) the Commissioner may also select a person for an audit of the person's income tax affairs having regard to any other matter, which in the opinion of the Commissioner is material for determination of correct income. In other words the Commissioner has to form an opinion by identifying other matters which will enable him to determine the correct income prior to selection of a person for an audit of his income tax affairs. Such opinion cannot be formed unless the Commissioner arrives at a definite conclusion that the income declared by such person is incorrect. The requirement of formation of opinion 'in itself suggests that opinion must be based on cogent reasons and not on pick and choose. In all the cases before this court the Commissioner has not made any determination that the income declared by the petitioners was incorrect. The Commissioner has merely proceeded to select cases at random by simply mentioning in his notice certain matters which according to the Commissioner may be material for audit purposes but the same is completely silent respecting any nexus or relevance to the determination of correct income. In all the impugned notices issued under clause (d) of section 177 (4), there is not even the slightest hint that the income declared by petitioners was not correct especially when the Commissioner should have formed an opinion qua the incorrectness of income declared before resorting to clause (d) wherein it is further binding on the Commissioner to furnish opinion as regards any other matter which is relevant for the determination of correct income of the person enumerated in clauses (a), (b) and (c) of subsection (4) of section 177.
27. A comparison of section 177 as its stood prior to the substitution of the new section by the Finance Act, 2004 and the amended section 177 as it presently stands will make it clear that the relatively wider or seemingly unbridled discretion available earlier to the Commissioner as regards the selection of any person for an audit of his income tax affairs is no longer available to him now. Section 177 as it stood prior to the coming into force of Finance Act, 2004'is reproduced as under:-
"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 rele vant."
That the aforesaid section 177 was amended by the Finance Act, 2004 and the same is as under:-
"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."
28. If the old and new section 177 .is placed in juxta position it becomes unambiguously clear that subsection (1) of earlier section 177 has been materially altered. In the earlier (subsection (1) no limitations were placed on the authority of the Commissioner to select person's case for audit of his income tax affairs. However in the amended section the Commissioner can only invoke clause (d) after fulfillment of the following conditions:--
(i) The Commissioner can select a person for audit in accordance with the criteria laid down by the Board under subsection (1)..
(ii) The persons history for compliance or non compliance with this Ordinance.
(iii) The amount of tax payable by the person.
(iv) The class of business conducted by the person.
29. The four conditions mentioned above are essential pre requisites provided by subsection (4) of amended section 177 of the Income Tax Ordinance 2001. It is clear from the introductory word of subsection (4) that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of his income tax affairs. The words "in addition to" do not mean in substitution to or in isolation of or that these words can by any stretch of imagination be construed to absolve the Federal Board of Revenue from laying down the criteria or the Commissioner from adhering to the same having regard to clauses (1) and (2) of section 177 of the Income Tax Ordinance, 2001.
30. In order to determine the legality of the impugned selection of cases on the touchstone of section 177(4) of the Income Tax Ordinance; 2001 it is of utmost relevance to scrutinize the contents of impugned letters. The relevant extract of some of the impugned letters are reproduced as under:
"W.P. No. 4811-09.
Your income Tax affairs for the tax year 2008 are hereby selected for audit under section 177(4) of the Income Tax ,Ordinance 2001 for reasons discussed hereunder:--
(1) For the year under consideration, sales have been declared at Rs.7,724,730 cost of sales Rs.7,010,190 and P&L expenses of Rs.302,191 to arrive at net profit of Rs.4,12,348. All the declared expenses seem to be inflated and require verification with regard to their admissibility and genuineness in terms of sections 21 and 174 of the Income Tax Ordinance, 2001.
For audit of your income tax affairs, the taxation officer concerned will soon get in touch with you. You are requested to extend your maximum cooperation with him by furnishing of details/evidences and explanation that he may requisite in connection with audit proceedings. It is, however, assured, that if nothing adverse is discovered against you, audit proceedings will be closed."
"W.P. No. 6390-09.
Your income Tax affairs for the tax year 2008 are hereby selected for audit under section 177(4) of the Income Tax Ordinance 2001 for reasons discussed hereunder:--
(1) For the year under consideration gross sales have been declared at Rs.10,377,800 cost of sales of Rs.8,679,294 and P&L Expenses at Rs.1,502,822 to arrive at declared net loss at (Rs.13,804,316). This state of affairs indicates that the claimed expenses are highly inflated and require verification regarding their admissibility and genuineness in terms of sections 21 and 174 of the Income Tax Ordinance, 2001.
(2) You have not declared the amount of capital employed in the business in the relevant column of your return. In the absence of the same the exact quantum of your business cannot be gauged. This aspect needs verification.
For audit of your income tax affairs, the taxation officer concerned will soon get in touch with you. You are requested to extend your maximum cooperation with him by furnishing of details/evidences and explanation that he may requisite in connection with audit proceedings. It is, however, assured that if nothing adverse is detected, audit proceedings will be closed."
"W.P. No. 7443-09.
Your income Tax affairs for the tax year 2008 are hereby selected for audit under section 177(4) of the Income Tax Ordinance 2001 for reasons discussed hereunder:-
(1) For the year under consideration gross sales have been declared at Rs.2,19,8,201 cost of sales of Rs.215,843,797 and P & L Expenses at Rs.3,746,105 to arrive at declared net profit at Rs.2,10,299. The declared net profit constitutes a ratio 0.1% of your declared gross sales, which is extremely low. This state of affairs indicates that the expenses claimed are inflated, which require verification regarding their admissibility and genuineness in terms of sections 21 and 174 of the Income Tax Ordinance, 2001.
(2) You have not mentioned the amount of capital employed in the business in the relevant column of return. This state of affairs require verification with regard to adequacy of funds to declare your closing stock at Rs.30,814,556 as well as to support the quantum of sales declared at Rs.2,19,800,201.
For audit of your income tax affairs, the taxation officer concerned will soon get in touch with you. You are requested to extend your, maximum cooperation with him by furnishing of details/evidences and explanation that he may requisite in connection with audit proceedings. It is, however, assured that if nothing adverse is detected, audit proceedings will be closed."
"W.P. No. 5946-09.
Your Income Tax affairs for the tax year 2008 are hereby selected for audit under section 177(4) of the Income Tax Ordinance, 2001 for reasons discussed hereunder:--
(1) For the year under consideration gross sales have been declared at Rs. 30,964,338 cost of: sales of Rs.23,223,25.3 and P&L Expenses at Rs.6,626,085 to arrive at net profit constitutes a ratio of 3.6% of the declared gross sales which is very low and requires verification with regard to their admissibility and genuineness in terms of sections 21 and 174 of the Income Tax Ordinance, 2001.
For audit of your income tax affairs, the taxation officer concerned will soon get in touch with you. You are requested to extend your maximum cooperation with him by furnishing of details/evidences and explanation that he may requisite in connection with audit proceedings. It is, however, assured that if nothing discovered against you, audit proceedings will be closed."
"W.P. No. 7505-09.
Your Income Tax affairs for the tax year 2008 are hereby selected for audit under section 177(4) of the Income Tax Ordinance 2001 for reasons discussed hereunder:--
(1) For the year under consideration gross sales/receipts have been declared of Rs.7,940,891, cost of sales/receipts at Rs.6;274,0.11 and P & L expenses at RS.1,339,303 to arrive at declared net profit at Rs.327,577. The claimed expenses also seem to be inflated and require verification regarding their admissibility and genuinenessin terms: of sections 21 and 174 of the Income Tax Ordinance, 2001.
(2) Capital employed in the business has not been declared in the relevant column of the return, which is imperative to gauge the actual strength/extent of your business. This aspect needs verification.
For audit of your income tax affairs, the taxation officer concerned will soon get in touch with you. You are requested to extend your maximum cooperation with him by furnishing of details/evidences and explanation that he may requisite in connection with audit proceedings. It is,' however, assured that if nothing adverse is detected, audit proceedings will be closed."
"W.P. No. 7499-09.
It is intimated that jurisdiction in your case for completion of audit proceedings and any further action thereon under the Income Tax Ordinance, 2001 has been assigned to the Audit Unit-05, Sialkot vide CIT (Audit' Division) Order: No. 359 dated 7-2-2009.
You are well aware of the fact that your case has been selected for audit under section 177(4)(d) read with section 120(1A) of the Income Tax Ordinance 2001 for tax.. year 2007. You are therefore, requested to please furnish the following documents/ explanation:-
1. Complete Books of account.
2. Profit and loss account.
3. Balance sheet/statement of business affairs.
4. Personal accounts.
5. Wealth statement as on 30-6-2007 (Notices under section 116(1) is enclosed for the purpose).
6. Stock Register with detail of stock inventories.
7. Carbon copies of sales vouchers with complete list of the parties to whom sales were made above Rs.10,000.
8. Purchase invoices with complete list of persons from whom purchases have been made above Rs.10,000.
9. Complete detail of expenses claimed in trading, profit and loss account with documentary evidence thereof.
10. Personal expenditure statement as on 30-6-2007.
11. Bank statements in respect of bank accounts maintained.
12. Copies of sale tax returns' filed for tax year 2007.
13. Explanation on the issues already conveyed vide Commissioner of Income Tax, Audit Division, RTO Sialkot's Letter No. 359 dated 7-2-2009."
You are requested to please furnish relevant documents and explanation on the above issues on 14-2-2009 at 9-30 a. m. positively. Please note that in case of non compliance an adverse inference shall be drawn and further action as provided under the law will be taken.
Approval to exercise powers under section 176 in this case has been granted by the Commissioner of Income Tax, Audit Division, Regional Tax Office, Sialkot vide his Letter No.368 dated 7-2-2009."
31. A bare perusal of the aforesaid impugned letters would show that in all of these letters no reasons what-so-ever have been mentioned as to why the petitioners case was selected for audit except that in some of the cases it is mentioned that all the declared expenses seem to be inflated and require verification with regard to their admissibility and genuineness in terms of section 21 of Income Tax Ordinance, 2001. As regards other impugned orders no reason what-so-ever has been mentioned qua the selection of case for audit. Even if the contents of these notices for the sake of argument is taken to be the material relevant for the determination of correct income, the same has no nexus to the contents enumerated in the preceding sub-clauses of subsection (4) of section 177 or the other preceding clauses of section 177. (If clause (d) of subsection (4) is to be interpreted in isolation of the remaining provisions of the same even then the opinion of Commissioner envisaged in clause (d) of subsection (4) of section 177 of Income Tax Ordinance is non-existent. Any opinion formed in violation of section 24-A of the General Clauses Act is no opinion in the eye of law.)
32. Of course clause (d) of subsection (4) will not apply in isolation of the preceding clauses or subsections of section 177 in as much as clause (d) is to apply in addition to such preceding clauses as has been held by this court above. Even if this court had agreed with the argument of Mr. Ilyas Khan, Advocate that clause (d) confers independent power upon the Commissioner to select a person for audit the latter is by no means absolved of forming an opinion that the matters enumerated in the impugned letters are necessary for determination of correct income. Such opinion cannot be formed unless the Commissioner concludes on the basis of valid grounds that the income declared by the person concerned is incorrect. Once such a conclusion is reached the Commissioner is then required to form an opinion as regards the matters which are relevant and necessary for the computation or determination of correct income. In none of the impugned letters referred to above or even in the parawise comments furnished by the respondents any opinion has been formed qua incorrectness of the income declared by the petitioners or as regards the matters which according to the Commissioner are material for the determination of correct income. Mere mention of such matters in the absence of formation of opinion that such matters are also material for determination of correct income is not enough. The formation of an opinion .qua relevance of such matters vis-a-vis the determination of correct income is undoubtedly an essential condition of sub-clause (d) of clause (4) of section 177 of the Income Tax Ordinance, 2001 even if this sub clause is read in isolation of its preceding clauses.
33. In a nutshell, the laying down of criteria for selection of any person for his income tax affairs in terms of subsection (1) of section 177 is an essential pre-requisite for the Commissioner to select a person for audit. Once the Commissioner has selected a case for audit in accordance with the criteria laid down by the Central Board of Revenue in terms of clause (1) of section 177 then additionally, the Commissioner can also select a person for an audit of the person Income Tax affairs having regard to the factors enumerated in clauses (a), (b.) and (c) of subsection (4) of section 177. It would be seen that subsection (4) will come into play only when the Commissioner in the course of proceeding with the audit of a person under subsection (2) of section 177 discovers that in addition to the selection of person in subsection (2) the Commissioner now requires to select another person for audit of Income Tax affairs. This is exactly what is envisaged in subsection (4) of section 177 wherein it is clearly mentioned that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of Income tax affairs. As such subsection (4) of section 177 is secondary in character in relation to sub sections (1) and (2). It therefore follows that if subsection (4) is not capable of being isolated from subsections (1) and (2), then clause (d) of subsection (4) cannot also be detached from its preceding clauses or sub sections.
34. This court is therefore of the opinion that different clauses of section 177 are inter related and the sequence or order in which these have been mentioned by the Legislature in its wisdom must be observed by the executive authorities in letter and spirit as an obligation since each clause augments the other. Clause (d) of subsection (4) of section 177 cannot be isolated from its preceding clauses or subsections in a manner that primary part of section 177 becomes redundant in view of such isolation thereby paralyzing the main body of the provision in question in order to make the residual or secondary clause extra potent.
35. Having decided the above question, the significance of other related issues cannot be under-rated or underestimated. Another important legal issue before this court is, the question as regards the issuance of a notice prior to the selection of a case for audit. This court has observed that section 177 of the Income Tax Ordinance is completely silent on this aspect. Similar was the position with regard to section 177 of the Income Tax Ordinance 2001 prior to the coming into force of Finance Act 2004. However the Lahore High Court in paragraph 8 of Muhammad Hussain's case reported in 2005 PTD 152, in spite of absence of specific provision of notice in the said law had held that before proceeding with the audit of an assessee, a prior notice is an essential requirement since audit of person's Income tax affairs results in prejudice being caused to the assessee, who becomes subjected to scrutiny and that the return filed by him is re-opened. The decision of the High Court in Muhammad Hussain's case was assailed in the Supreme Court in the case reported as 2009 SCMR 344 = 2009 PTD 37 titled "Commissioner of Income Tax and others v. Fatima Sharif Textile Mills Kasur and others. Consequently with the consent of all the concerned parties paragraph 8 referred to above of Muhammad Hussain's case was expunged. The judgment of the Supreme Court in, Fatima Sharif's case was based on a compromise between the parties and as such it did not decide any question of law with regard to the issuance of notice prior to an assessee's case for selection of audit. Even otherwise the Attorney General in Fatima Sharif's case had requested for expunction of paragraph 8 and last three lines of para. 7 whereas all other paragraphs of judgment in Muhammad Hussain's case had attained finality. This court therefore is not inclined to agree with the contention of Mr. Muhammad Ilyas Khan that the impugned letters are not prejudicial to the interests of the petitioners. The selection of a case for audit in itself is tantamount to an adverse order since it undermines the sanctity of an assessment order issued by the Commissioner of Income Tax in terms of clause (b) of subsection (1) of section 120 of the Income Tax Ordinance, 2001. An adverse order made without affording an opportunity of personal hearing is to be treated as a void order. It is because of this reason that Hon'ble Supreme Court of Pakistan has always laid its utmost stress on strict observance of norms of natural justice in general and the principles of audi alteram partem in particular. These principles are to be read into every statute. Reliance in this regard is being placed on PLD 2008 SC 663, 2007 SCMR 330, 2005 SCMR 678, 2005 SCMR 1814 and PLD 2004 SC 441.
36. Having regard to the aforesaid dicta of the Hon'ble Supreme Court prior notice to the present petitioners qua selection of their cases for audit is of immense significance and the absence thereof in the cases in question is sufficient to render the impugned letters to be devoid of any legal justification.
37. Another important issue which has arisen in these cases is regarding the authority of the Commissioner to select cases for audit in the absence of the criteria for selection of any person for an audit of his income tax affairs provided by subsection (1) of section 177 of the Income Tax Ordinance 2001. This court is of the opinion that Commissioner of Income Tax cannot select a case for audit under clause (d) of subsection (4) of section 177 of the Income Tax Ordinance, 2001 unless criteria provided has been duly laid down in terms of subsection (1) of section 177 by the Federal Board of Revenue because Commissioner can only select cases for audit in addition to selection of audit referred to in, subsection (2) of section 177 but he cannot select cases for audit in substitution or in isolation thereof. This court has arrived at this estimation after having considered the import of the words, "in addition to" appearing at the beginning of subsection (4) of section 177 of the Income Tax Ordinance, 2001.
38. The words "in addition to" mean moreover, additionally, also. In the context of section 177 of the Income Tax Ordinance, 2001 or otherwise these words convey that something is to be done moreover or additionally with reference to that thing which is being done prior thereto. These words have a tilt towards something other than the usual. In these words there is a tinge of something which is relatively exceptional or which is in contradistinction to what is usually or generally to be accomplished in routine. To the contrary the Commissioner of Income Taxis not selecting cases for audit in addition to the selection referred to in subsection (2) of section 177 but in-fact the Commissioner is selecting these cases as a matter of routine because scores of cases have been picked up by the Commissioner under clause (d) of subsection (4) of section 177 but not a single case has been selected by him in terms of the selection referred to in subsection (2) of section 177. The impugned selection of cases on this score alone is illegal.
39. Having regard to the gist of the arguments advanced before this court and keeping in view the crux of what has been stated above, all these writ petitions are accepted and the impugned orders passed by the Commissioner Income Tax (Audit) are hereby declared to have been issued without lawful authority and as such the same are of no legal effect. Consequently a direction is issued to respondent Federal Board of Revenue to lay down a criteria in compliance with the mandate of section 177 of the Income Tax Ordinance 2001 whereafter de novo proceedings be. initiated with regard to the income tax affairs of such persons who come within the purview of the said criteria while ensuring that persons similarly placed are treated alike; in furtherance with Article 25 of the Constitution of Islamic Republic of Pakistan, 1973 and selection of cases for audit on the basis of whimsical pick and choose at random resulting in discrimination ought to be avoided.
M.B.A./ M-54/LPetitions allowed.