BAHRIA TOWN (PVT.) LTD. VS FEDERATION OF PAKISTAN through Chairman Federal Board of Revenue, 2015 PTD-ISLAMABAD 1790 (2015)

Income Tax Ordinance (XLIX of 2001)---

----S. 177---Constitution of Pakistan, Art. 199---Constitutional petition---Audit, selection for---Company maintaining double accounts---Commissioner (Inland Revenue) selected petitioner-company for audit on the basis of a report prepared by an Inquiry Commission on the directions of the Supreme Court---Held, that the Commissioner was vested with vast powers to ask for audit of any person's income tax affairs on the basis of credible information---Inquiry Commission, in the present case, found huge differences between the statements of income tax return filed before the Federal Board of Revenue and that filed before the Securities and Exchange Commission of Pakistan---Such an anomaly could only be removed by way of conducting an audit---Commissioner, in the present case, had rightly proceeded in the matter by selecting petitioner-company for audit---Audit by itself was not an adverse act and through notice sent to petitioner-company, it had not been called upon to pay the tax or any penalty, but was provided with an opportunity to establish, that returns submitted by it were not the result of any misrepresentation, cheating or fraud, rather were true facts recorded in the account books---Constitutional petition was dismissed accordingly.

Barrister Gohar Ali Khan and Syed Tauqeer Bukhari for Petitioner.

Babar Bilal and Abdullah Alim Qureshi for Respondents.

Date of hearing: 28th May, 2015.

JUDGMENT

SHAUKAT AZIZ SIDDIQUI, J.---Through this Single Judgment Writ Petitions Nos. 3024, 3027, 3028 and 3081/2013 are being disposed of as questions raised and issue agitated through all these petitions are same.

2.Petitioner Messrs Bahria Town (Pvt.) Ltd., invoked the Constitutional Jurisdiction of this Court by way of filing instant Petitions with the following prayer:--

"In view of the above submissions, it is most respectfully prayed that the selection of audit under Section 177 for the Tax year 2011 may kindly be declared discriminatory, illegal as well as against the Article 25 of the Constitution. Or

Any other relief deemed appropriate in the circumstances by this Honourable Court may also graciously be granted".

3.Petitioner, a Private Ltd. Company, duly formed under the Companies Ordinance, 1984, is engaged in the business and management of Housing Estate, Societies, etc., which through these petitions challenged the allegedly discriminatory selection of petitioner's case for audit by the respondent No.2, under Section 177 of the Income Tax Ordinance, 2001 for the Tax Years, 2008 to 2011; subsequent letters issued by the respondent No.3 on the direction of respondent No.2, for information documents request (IDR for the same Tax Year) as allegedly being illegal and against the provisions of Income Tax Ordinance, 2001.

4.Learned counsel for the petitioner contended that the Selection of its accounts for audit, concerning multiple years audits i.e. Tax Year, 2008 to Tax Year 2011, is discriminatory, illegal as well as against the provisions of Income Tax Ordinance, 2001. Learned Counsel further contended that the act of the respondent is in violation of Articles 4, 9, 10A, 14, 18, 19A, 24 and 25 of the Constitution of the Islamic Republic of Pakistan, 1973. Learned Counsel referred the case of Messrs OMV Pakistan Exploration v. CIR reported as 2013 PTD 1620 (W.P. No.139/2012) IN WHICH THIS Court had held that if the Selection of audit is discriminatory then the same could be struck down by the High Court in exercise of its constitutional jurisdiction. Learned Counsel added that under the Income Tax Ordinance, 2001 the return filed by the taxpayer amounts to an assessment order under Section 120 of the Ordinance, 2001 and when the department opts to reopen the case for scrutiny/audit/detail analysis, a show-cause notice to the taxpayer has to be given before the selection/proceedings and petitioner's case for total audit without issuance of show-cause notice is a clear example of discrimination. Reliance was placed on the case-law reported as (2009 PTD 37), (PLD 1962 Lah. 151), (1981 SCMR 1061), (1985 CLC 199), (1985 CLC 2859), (1991 CLC 229), (1991 MLD 267), and (PLD 2002 SC 408). Learned Counsel in furtherance of this argument submitted that admittedly there is no provision of show-cause notice to the assessee, however, the Hon'ble Supreme Court of Pakistan in case "Commissioner of Income Tax and others v. Fatima Sharif Textile, Kasur, and others (2009 SCMR 344) has held that even in absence of specific provision regarding issuance of notice, audit could not be conducted without issuance of notice, as the assessee could not be condemned unheard. Learned counsel further submitted that the Commissioner may select a person for audit under the provision of first proviso of Section 177 of the Income Tax Ordinance, 2001, after recording reasons in writing for selection of audit and the said reasons must be based on definite information as required under Section 122(5) of the Income Tax Ordinance, 2001, which reasons should not be discriminating, whereas, in petitioner's case reasons for selection of case are purely discriminatory. Moreover, One Man Inquiry Commission report in the case of petitioner is also discriminatory/disputed as information contained therein does not fulfill the ingredients of definite information under Section 122(5) read with Section 122(8) of the Income Tax Ordinance, 2001. Reliance in this regard was placed on the case-law reported as Deputy Commissioner IR v. Khan CNG Station 2013 PTD 884. Learned counsel lastly contended that the authority of selection of a case for audit rests with the Federal Board of Revenue under Section 214C and that too through a parametric balloting, whereas, selection of cases directly by the Commission in presence of said provision of law amounts to discrimination.

5.Vide Order dated 30-10-2013, respondents were called upon to file Report and Para wise Comments, which were filed in which preliminary objections were raised:--

That the Writ Petition is not maintainable in the light of case-law reported as Messrs Honda Fort (Pvt.) Ltd. v. Commissioner of Income Tax (2009 PTD 20) in which it has been held by the Hon'ble Lahore High Court, Lahore that Writ does not lie against the initiation of proceedings under section 177 of the Income Tax Ordinance, 2001;

No adverse action has been initiated against the petitioner as only letter regarding selection of case for audit under section 177 of the Income Tax Ordinance, 2001 has been served on the petitioner, therefore, instant Petition has no merits and liable to be dismissed;

Petitioner has alternate and efficacious remedy of raising the objection before the departmental authorities on factual as well as legal grounds;

The question involved in the present petition has already been decided by this Court in the case of Messrs OMV Pakistan reported as (2013 PTD 1620);

On facts the stance of the respondent surfaced as under:--

The petitioner's selection or audit is not discriminatory as its case has been considered in accordance with relevant law as in terms of Section 177 of the Income Tax Ordinance, 2001 Commissioner is fully empowered to select and choose cases for audit. Moreover, definite information envisaged under section 122(5) of the Income Tax Ordinance, 2001 is not a requirement of selection of case for audit under Section 177, which duly empowers the Commissioner for conducting an audit of the Income Tax affairs of a person;

On the contrary, learned counsel for respondents submits that huge difference of Income tax Returns has been shown in the report of One Man Inquiry Commission between the Income Tax Returns filed before the FBR and Securities and Exchange Commission of Pakistan (SECP), therefore, Commissioner exercised his authority under Section 177 of the Income Tax Ordinance, 2001. Learned counsel further submits that plain reading of notice suggests that petitioner has been called upon to remove the anomaly by way of audit and if petitioner's hands are clean, no hesitation should have been demonstrated.

6.I have heard the learned counsel and perused the record.

7.The Hon'ble Supreme Court of Pakistan in C.R.P. No. 167/2012 (Suo-Motu Case No. 5/2012) vide order dated 28-8-2012 has held that:--

"After giving consideration to the matter, we entrusted the inquiry to a One Man Inquiry Commission comprising of Dr. Muhammad Shoaib Saddle who is a senior functionary having experience of investigations in the police and fiscal hierarchies and is occupying an independent tenured positions in the Federal Tax Ombudsman. The professionalism and thoroughness of the inquiry undertaken by him in SMC 16 of 2010 (ISAF Containers Scam) has also persuaded us to refer this inquiry to him. He will:--

(a)Probe into the culpability of Malik Riaz Hussain, Dr. Arsalan Iftikhar, Salman Ali Khan and all those others who may be found involved in criminal activities in the light of our earlier order dated 14-6-2012 and the observations made hereinabove;

(b)Specify the legal provisions and offences, if any, which may be attracted in the case based on the fact finding undertaken by the Commission;

(c)Inquire into and ascertain such facts as may be relevant, connected with or ancillary to the determination of the foregoing matters and to set the machinery of the State in the motion so that all those who may have committed illegal acts are pursued and brought to book with the full force and rigour of the law.".

In compliance of order of Hon'ble Supreme Court, Inquiry Commission, conducted the proceedings and submitted three interim reports. The Inquiry Commission in para.13 of its third interim report dated 4-12-2012 provided following reference:--

"30. Double Accounting.---In the case of Messrs Bahria Town (Pvt). Ltd., also serious anomalies have been, prima facie, detected in audited accounts presented to FBR and SECP. The following table is indicative of such double accounts:

Based on above information Commissioner (IR) through notice dated 4-4-2013 called upon the petitioner by issuing certain directions. For reference said notice is reproduced here-in-below:-

"GOVERNMENT OF PAKISTAN

COMMISSIONER INLAND REVENUE, ZONE-II

LARGE TAXPAYERS'S UNIT MAUVE AREA, G-9/1, ISLAMABAD.

Phone No. 9106103Dated 4-4-2013

The Principal Officer,

Messrs Bahria Town (Pvt) Ltd

Customers Support Centre, Phase VIII, Belida Town, Rawalpindi

Subject:AUDIT UNDER SECTION 177 OF THE INCOME TAX ORDINANCE, 2001 FOR TAX YEAR, 2011-Messrs BAHRIA TOWN (PVT.) LTD.

Dear Taxpayer,

In pursuance of the provisions of subsection(1) of Section 177 of the Income Tax Ordinance, 2001, and for the reasons recorded hereunder, records/documents including books of accounts for the period relating to Tax Year, 2011 be furnished for conducting audit of income tax affairs of your company. The reasons/basis for conducting the audit of your business concern are as follows:-

The audit is necessitated, as based on information contained in "One Man Enquiry Commission" report, certain discrepancies have been noted in your records for the subject period which need to be explained, as detailed below:-

(i)Apparently, the company maintains double accounts as different sets of audited accounts have been presented to FBR and SECP, declaring different profits, as given below:-

Based on the above discrepancy for tax year, 2005, similar discrepancy situation is suspected for the year under consideration. For this purpose, audited accounts as submitted by you to SECP need to be examined to ascertain facts.

(ii)Your company has received advances from customers w.e.f 1998 to 2011 against future sale of plots and constructed houses to the extent of Rs.83.6 billion. The company has recognized only Rs.39.5 billion as sales and balance amount of Rs.44.1 billion as liability. In this regard, the actual recognition of sales up to 30-6-2007 needs to be identified.

The nature of the business of the company requires it to compute its income according to International Accounting Standard. Whereas, the audited account filed states that it recognizes its advances from customers on the basis of percentage of work done. The company has not disclosed the computation of income in its account on the basis of percentage of work done. It gives only a limp-sum figure of income in the audited accounts and return of income. Application of Section 36, therefore, needs to be ascertained in your case.

The Company has declared net cumulative loss of Rs.77,098,088 from 1997-98 to 2011 despite having received advances of Rs.83.6 billion from customers. This issue also needs to be verified in the light of documentary evidence to be provided by you.

(iii)During the year under consideration your company has declared net sales of Rs.4,474,280,343. However, computation of income on the basis of percentage of work completed has not been disclosed. Therefore, project wise details to be provided by you need to be examined to see compliance with law.

(iv)Your company has purchased land as per following detail:--

The actual cost of land needs to be verified from the mutation deed reflecting transfer of ownership to you.

The officer Inland Revenue (Audit-VI) has been directed to contact you and obtain necessary records/documents including books of accounts. He will conduct audit by examining the relevant records and related material maintained by you as per declaration in your return of income under section 114(2)(b) of the Income Tax Ordinance, 2001. It is expected that you will extend maximum co-operation to the concerned Officer in finalizing the audit at the earliest.

(ABDUL RASHID)

Commissioner (IR)

Copy to:

(1)The Additional Commissioner, Audit-II, LTU, Islamabad with the direction to associate with audit proceedings.

(2)The Officer Inland Revenue, Audit-VI, LTU, Islamabad with the directions to initiate audit proceedings.

(ABDUL RASHID)

Commissioner (IR)"

Before proceeding further in the matter it would be appropriate to provide Section 177 of the Income Tax Ordinance, 2001:--

"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 (I) or sub-section (4) of section 122, as the case may be.

(7)The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits, particularly having regard to the factors in sub-section (4).

(8)The Board may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961) to conduct an audit of the income tax affairs of any person and the scope of such audit shall as determined by the Board on a case to case basis.

(9)Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that subsection.".

Plain reading of above provision makes it abundantly clear that Commissioner is vested with vast powers to ask for the audit of any person's Income Tax affairs on the basis of credible information. There is no doubt that One Man Inquiry Commission in its Third Interim Report, noted huge difference of two statements made in income Tax Returns before the FBR and SECP. This anomaly can only be removed by way of conducting audit and in my opinion the Commissioner has rightly proceeded in the matter as per requirement of law. Audit by itself is not an adverse act and through the notice impugned petitioner has not been called upon to pay the tax or any penalty but provided an opportunity to establish, that returns submitted in the years 2008-2009 and 2010-2011 are not result of any misrepresentation, cheating or fraud rather true facts recoded in the account books. The objection raised by the learned counsel should have been raised before the Commissioner in response to impugned notice.

8.In this view of the matter, I do not see any substance in these petitions which are dismissed.

MWA/77/IslPetition dismissed.