MUHAMMAD SALEEM SARWAR VS SECRETARY, REVENUE DIVISION, ISLAMABAD, 2012 PTD-FEDERAL-TAX-OMBUDSMAN-PAKISTAN 401 (2011)

Income Tax Ordinance (XLIX of 2001)---

----Ss.120 & 177---Complaint against conduct of 'composite audit'---Complainant was informed by the Commissioner Internal Revenue that his case had been selected by the Federal Board of Revenue through random Computer ballot for conduct of "Composite audit" for tax year 2008, (composite audit referred to the simultaneous conduct of audit both in income tax and Sales Tax cases)---Complainant had protested that "composite audit" was not an acceptable method of 'conducting audit'---Phrase "Composite audit" did not appear anywhere in the statutes governing income tax and sales tax assessments---Assessment of income per se, was not the moot point in the complaint, but the method adopted to determine the income of the complainant for purposes of levy of Income Tax and Sales Tax simultaneously through conduct of a 'composite audit', had been complained against---'Composite audit' exposed the complainant to double jeopardy---'Composite audit' was far removed from audit as ordinarily envisaged in the Income Tax and Sales Tax statutes---Said audit subjected a taxpayer to multiple audit proceedings, simultaneously under two different statutes, and created a climate of uncertainty and raised the prospect of unforeseen risks for the complainant---Departmental failure to follow the judgment of High Court on the subject would constitute maladministration as defined under S.2(3) of Establishment of Office of Federal Tax Ombudsman Ordinance, 2000---Federal Board of Revenue was recommended to withdraw notices issued for conduct of "composite audit" in the complainant's case with 15 days and report compliance within 5 days thereafter.

2011 PTD 1558 rel

(2011) 103 Tax 131 (SC Pak.) distinguished.

Muhammad Munir Qureshi, Advisor Dealing Officer.

Muhammad Humayun Authorized Representative.

Safdar Bhatti,ACIR Departmental Representative.

FINDINGS/RECOMMENDATIONS

DR. MUHAMMAD SHOAIB SUDDLE, FEDERAL TAX OMBUDSMAN.---This complaint is against conduct of 'composite audit' for Tax Year 2008.

2.The complainant was informed by the Commissioner Internal Revenue (CIR), RTO, Faisalabad, vide his Letter No.CIR(Audit-II)/ RTO/FSD/697 dated 25-3-2010, that his case had been selected by the F.B.R. through random computer ballot for conduct of 'composite audit' for Tax Year 2008. (Composite audit refers to the simultaneous conduct of audit both in income tax and sales tax cases). The complainant protested that 'composite audit' was not an acceptable method of conducting audit. The phrase 'composite audit' did not appear anywhere in the statutes governing income tax or sales tax assessments. The legality of selection of cases by F.B.R. for conduct of 'composite audit' was considered by the Hon'ble Sindh High Court in judgment cited as 2011 PTD 1558 and it was held that:--

"... The combined ballot exposes a person simultaneously to the "double jeopardy" of an audit of both sales tax affairs and income tax affairs, for which there does not appear to be any warrant in law. Inthiscontext,itisalsoto benoted, that the Federal Excise Act, 2005 does provide (in its section 46(5)) for a composite audit. It seems therefore that whenever a composite audit was deemed appropriate, the legislative intent was clearly stated, and the absence of any such provision in either the 2001 Ordinance or the 1990 Act indicates that no such audit is permissible in relation to these two laws ..we are therefore of the view that the "composite audit" in the present case was also without lawful authority." (emphasis supplied).

3.The complainant brought the afore-cited judgment to the attention of the Departmentand pleaded that the 'composite audit' proceedings be stopped. The Department however was of the view that the complainant was not a party in the SHC judgment, and so the SHC decision could not be applied in his case.

4.The complainant argued that the rationale of the SHC judgment applied to all cases of 'composite audit', and so proceedings against him be allowed to abate.

5.When confronted, the Department filed a reply raising two preliminary objections: firstly that the complaint was time-barred, and, secondly, that the matter detailed in the complaint pertained to conduct of 'composite audit' for purposes of assessment of income for which the Hon'ble FTO did not have jurisdiction under the FTO Ordinance. According to the Department the complainant first became aware of the selection of his case for conduct of 'composite audit' on 25-3-2010 but filed a complaint against the selection on 20-10-2011, almost three weeks after expiry of the six month limitation. Also, no application for condonation of delay was filed along with the complaint. On merits, the Department submits that the method of selection of cases for conduct of audit through random ballot stands approved by the Hon'ble Supreme Court of Pakistan in judgment cited as (2011) 103 Tax 131 (S.C. Pak.).

6.According to the complainant, he took up the matter with the Department after being informed that the case was selected for conduct of 'composite audit' and attempted to convince the concerned officials that such a course was not legally tenable. When he did not succeed, he filed an application before the Member Inland Revenue, drawing his attention to the Sindh High Court judgment referred to above. As no response was received from F.B.R., a complaint was filed before the Hon'ble FTO. The complainant contends that any delay on his part in filing the complaint, therefore, merited to be condoned in the interest of justice.

7.After due consideration, the delay in filing complaint before the Hon'ble FTO is condoned as this is not a case of wilful negligence on the part of the complainant.

8.As regards the Departmental objection in terms of the bar laid down in section 9(2)(b) of the FTO Ordinance, the matter has been examined and the Departmental objection found to be misconceived. Assessment of Income per se is not the moot point in the complaint. Rather, the method adopted to determine the complainant's income for purposes of levy of Income Tax and Sales Tax simultaneously through conduct of a 'composite audit' has been complained against. As held in the SHC judgment, the 'composite audit' method exposes the complainant to double jeopardy. The Departmental objection in this regard is rejected, being without merit.

9.The Departmental reference to the apex court judgment cited as (2011) 103 Tax 131 SC Pak has been looked into. The said judgment is found to have no bearing in the present case as it relates to F.B.R's. selection of cases of Companies and AOPs for audit in Tax Year 2008 through the 'random ballot' method, and 'composite audit' finds no mention in the judgment. The complainant has not contested selection of cases for audit through random ballot. He only objects to the conduct of 'composite audit'. As held in the SHC judgment, there is a significant qualitative difference between income tax audit and sales tax audit. The phrase 'composite audit' does not appear anywhere in either the Income Tax Ordinance, 2001 or the Sales Tax Act, 1990. Nor is its precise import under the two statutes clear.

10.The SHC judgment referred to by complainant is a judgment which is binding on the Department. The analysis made therein clearly shows that 'composite audit' is far removed from audit as ordinarily envisaged in the income tax and sales tax statutes. In so far as it subjects a taxpayer to multiple audit proceedings simultaneously under two different statutes, one involving direct, and, the other, indirect taxation, it creates a climate of uncertainty and raises the prospect of unforeseen risks for the complainant. Such a decision by F.B.R. is a significant departure from established practice and procedure regarding conduct of audit, without brining on record any justification for the same.

Findings:

11.Departmental failure to follow the SHC judgment, there being no contrary judgment on this issue in the field, constitutes maladministration as defined under section 2(3) of the FTO Ordinance, 2000.

Recommendations:--

12.F.B.R. to--

(i)withdraw notices issued for conduct of 'composite audit' in the complainant's case within 15 days; and

(ii)report compliance within 5 days thereafter.

H.B.T./9/FTOOrder accordingly.