ROOTS MONTESSORI AND HIGH SCHOOL, RAWALPINDI VS COMMISSIONER OF INCOME TAX (AUDIT), RAWALPINDI
2010 P T D 395
[Lahore High Court]
Before Imtiaz Rashid Siddiqui, J
Messrs ROOTS MONTESSORI AND HIGH SCHOOL, RAWALPINDI
Versus
COMMISSIONER OF INCOME TAX (AUDIT), RAWALPINDI and 3 others
Writ Petitions Nos.1858 of 2008, 209, 453, 709, 816 and 1030 of 2009, heard on 8th June, 2009.
(a) Income Tax Ordinance (XLIX of 2001)--- ----S. 177(1)---Selection of a person for total audit---Criteria for such selection not prescribed by Board---Effect---Such criteria being confidential and having no nexus with the taxpayers: would merely Provide guidance for tax officials---Such selection could be done by Commissioner in exercise of his powers under section 177(4) of Income Tax Ordinance, 2001 and had nothing with such criteria---Principles.
(b) Income Tax Ordinance (XLIX of 2001)---
---S. 177---Selection of person for total audit---Absence of period of limitation in S.177 of Income Tax Ordinance, 2001 would not mean that only assessment of current year could be audited---Principles.
(c) Income Tax Ordinance (XLIX of 2001)---
----Ss. 177 & 207---Selection of person for total audit---"Commissioner" appointed under S.207 of Income Tax Ordinance, 2001 might be known as "Commissioner Audit for purposes of S.177 thereof.
(d) Income Tax Ordinance (XLIX of 2001)---
----S.177(4)---Constitution of Pakistan (1973), Art. 199---Constitutional petition---Selection of petitioner's assessment for audit without issuing prior notice or inviting his explanation thereto---Validity---Audit was not a conclusion of any proceedings, but was only a beginning thereof---Balance had to be maintained for protecting rights of taxpayer, thus, compliance with norms of justice was imperative while selecting an assessment for audit---High Court accepted constitutional petition while directing authority to give an opportunity of hearing to petitioner before selecting his assessment for audit.
Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others 2009 SCMR 344 =2009 PTD 37 rel.
Hafiz Muhammad Idris for Petitioner (in Writ Petitions Nos.1858 of 2008 209, 453 and 709 of 2009).
S.A. Mahmood Khan Saddozai for Petitioner (in Writ Petitions Nos.816 and 1030 of 2009).
Babar Bilal for Respondents (in Writ Petition No.1858 of 2008).
Ms. Shahina Akbar for Respondents (in Writ Petitions Nos.209 and 1030 of 2009).
Muhammad Naeem Qazi for Respondents (in Writ Petition No.453 of 2009).
Syed Nayyar Hussain for Respondents (in Writ Petition No.816 of 2009).
Date of hearing: 8th June, 2009.
JUDGMENT
IMTIAZ RASHID SIDDIQUI, J.---This order covers Writ Petitions Nos.1858/2008, 209/2009, 453/2009, 709/2009, 816/2009 and 1030/2009, as same facts and law are involved herein.
2. The petitioners, being assessees, have been served with notices under section 177 of the Income Tax Ordinance, 2001 (herein the "Ordinance") intimating them that their eases have been selected for audits on the basis of observations as contained in the aforesaid notices. These notices have been challenged herein, with regards assumption and exercise of jurisdiction by the respondents under the mentioned provision of the Ordinance.
In response to the direction issued by this Court, the respondents have appeared and filed report and parawise comments; on the basis thereof they have justified their action.
3. Detailed arguments have been heard and the record along with relevant statutory provisions of the Ordinance have been perused with the assistance of respective learned counsel for the parties.
4. According to the learned counsel for the petitioners, sec tion 177(1) of the Ordinance, provides that the Federal Board of Revenue may prescribe a criteria for selection of audit of any person's income tax affairs; on the basis thereof the Commissioner is to select any such person for audit.
According to the counsel, if a person does not come within the stated criteria prescribed by the Board only then he can be selected for audit under subsection (4) of the aforesaid section by the Commissioner: This selection for audit, as per the learned counsel, is to be done on the basis of parameters given under clauses (a) to (d) of subsection (4) of section 177 of the Ordinance.
5. It is the stance of learned counsel, that as such a criteria has not been laid down by the Federal Board of Revenue, therefore, the respondent-Commissioner does not have any jurisdiction to select any person for audit.
In the alternative, it is further contended that the impugned notices are utterly silent viz. the clauses under which these have been issued with reference to clauses given in (a) to (d) to section 177(4). It is stated that due to the aforesaid defect, these notices are bad in law and as such are liable to be struck down.
In the same sequence, it has also been contended--that as section 177 of the aforesaid Ordinance does not provide any limitation for the purposes of relevant year for which .the- audit can be conducted; thus, as per the learned counsel, in the absence of any limitation, audit can only be conducted for the current year and not for any other year.
It is also contended in the context of the stated section, a right of prior hearing is a prerequisite before selection of a case for audit of any person, under the Ordinance as per principle of "audi alteram partem", thus the impugned notices are bad in law.
Lastly it has also been asserted that under the Ordinance, there does not exist any post of "Commissioner Audit"; any exercise of powers by such a "designated official" is without jurisdiction.
6. The aforesaid arguments have been controverted by the respondents and they have defended the impugned notices which according to them are in accordance with the provisions of the Ordinance.
7. In order to appreciate the respective stance of the parties and merits of their arguments, it is appropriate to reproduce the relevant portion of section 177 of the Ordinance, 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.
(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 sub-section (4) of section 122, as the case may be.
(7)
(8)
(9)
8. Indeed a bare perusal of the above provision shows that the criteria which may be prescribed for selection of audit under subsection (1) is confidential and has no nexus with the taxpayer: It is only to provide guidance for the tax officials.
However, subsection (4) of the referred provision contains a separate mechanism for selection of a person for audit; this is to be done by the respondent-Commissioner and the same does not have any nexus whatsoever with the criteria which may or may not be laid down by the Board. It is thus a mistaken impression that subsection (4) is in any way dependent or interconnected with subsection (1) to (3) of section 177.
In the same sequence it would be utterly incorrect to assume that in absence of any criteria by the Board as referred above, the powers of the Commissioner under subsection (4) would become redundant; such a reasoning is not supported under any known principle of interpretation. In fact the powers of 'the Commissioner, under subsection (4) are independent for selecting a person for audit and is regulated in a transparent manner as per statutory criteria given in clauses (a) to (d) thereto.
9. The stance that due to absence of period of limitation in section 177 of the Ordinance, only the assessment of current year can be audited, is also not tenable; this restricted reading of the statutory provision cannot be sustained on any legal philosophy. This provision relates to audit and to place a limitation upon it on the basis of a hypothetical interpretation is neither valid nor justified.
In order to ascertain the period for which an audit of a person can be conducted by the respondents, the accumulative effect of other provisions to the Ordinance are to be taken into consideration which inter alia includes the limitation given in sections 122 and 174 thereof.
Similarly, the argument that there does not exist any officer as "Commissioner Audit" under the Ordinance is also without merit; admittedly any person appointed as a "Commissioner" under section 207 may be known by any other designation; it does not matter since for statutory purposes he is and remains a Commissioner under the Ordinance.
10. The argument that a show notice is pre-requisite before selection and conduct of audit under section 177 of the Ordinance, however, requires serious a consideration herein.
11. The stance of respondents that audit proceedings are procedural in nature and a mere selection for audit does not cause any prejudice, is not well founded.
In fact this issue, in a litigation relating to section 177 of the Ordinance, was dealt by the august Supreme Court of Pakistan and is reported in case titled "Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur and others 2009 SCMR 344 = 2009 PTD 37. This judgment relates to similar selection of cases for audit under section 177 of the Ordinance; the matter was dealt by the apex Court. A reference to the said judgment is necessary and relevant portion thereof is reproduced herein; the same is as follows:-
"3. ..
..Learned counsel appearing for the respondents stated that they have no objection if above observations are expunged or set aside and appeals are disposed of in terms that appellants may issue notices to the respondents in terms of section 177 of Income tax Ordinance, 2001, as it was applicable at the relevant time, disclosing criteria/reasons of selecting their cases for the purposes of audit. It is also pointed out that in some of the cases the C.B.R. had issued Circular No.1(1)s(ITAS)/2004, under which returns have been revised and payment of tax was made, therefore, in such cases observation for issuance of fresh notices will be issued.
4. The learned Attorney General raised no objection and stated that in those cases no further proceedings under section 177 of the Ordinance, shall be initiated against them.
5. In view of the above arrangement between the parties, the appeals are disposed of with consent, consequently, the portions of the impugned judgment reproduced hereinabove are deleted with the observation that let appellants issue fresh notices to the respondents in terms of section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purposes of audit. As far as the cases in respect whereof observations have been made hereinabove relating to Circular C. No. 1(1)s(ITAS)/2004 or otherwise if the returns have been revised and payment has been made by the assessees no further action shall be taken against them. The parties are left to bear their own costs."
12. The aforesaid cases were then disposed of with a direction, as contained in the referred judgment, to respondents to issue fresh notices in terms of section 177 of the Ordinance disclosing criteria/reasons for selecting cases for purposes of audit.
13. Thus the aforesaid principle laid down and applied by the apex Court is to be followed herein viz. the impugned notices as it appears that in a mechanical manner stereotype reasons for selection of the cases for audit have been given to the assessee. It is indeed surprising to note that despite the decision of august Supreme Court of Pakistan, in selection of the cases for audit herein, neither any notice was given nor any explanation has been required from the petitioner.
14. It is true that an audit in itself is not a conclusion of any proceeding but it is only a beginning thereof, which may or may not lead to re-assessment or increase in liability. However, a balance has to be maintained for protecting the rights of taxpayer; thus compliance with norms of justice, is imperative herein.
15. Accordingly the respondents are hereby directed to forthwith provide and give the petitioners a notice containing detailed and firm basis in addition to the one already contained in the impugned notices which should fall within the parameters of section 177(4) to the Ordinance. The petitioners will be allowed an opportunity of being heard and to justify that the criteria applied to them vis-a-vis conduct of audit as per section 177(4)(a) to (d) is attracted. However, if the matter falls within the given statutory criteria and requires audit for justifiable reasons, audit of the petitioners in accordance with the provisions of the aforesaid Ordinance will be conducted fairly and expeditiously.
16. These petitions to this extent, are allowed and disposed of as per terms contained herein above.
S.A.K./R-87/LPetitions accepted.