NORINPACO VS FEDERATION OF PAKISTAN

2016 P T D 1214

[Sindh High Court]

Before Faisal Arab, C.J. and M. Iqbal Kalhoro, J

NORINPACO and others

Versus

FEDERATION OF PAKISTAN and others

C.Ps. Nos. 1852, D-1922, D-1931 and D-1932, D-2922, D-3540, D-3166 of 2010 D-2145, D-1744, D-3955, D-543 and 10 of 2011, D-1124, D-749, D-1703, D-2911, D-4335 and D-4456 of 2012, D-2544 of 2013, D-3807, D-2361, D-3124, D-3252, D-3874, D-4415, D-4386 and D-5761 of 2014, D-5879, D-1152, D-3794, D-3795, D-3796, D-3797, D-5671, D-1433, D-1619, D-3702, D-984, D-3619, D-1112, D-1354, D-1620, D-2243, D-1631, 2005 and D-973 of 2015, decided on 02/12/2015.

Income Tax Ordinance (XLIX of 2001)---

----Ss.120(1A), 122(5), 214C & 177---Assessment---Audit---Scope of power of Commissioner to conduct audit under S. 120(1A) of the Income Tax Ordinance, 2001 distinguished from selection by Board for audit under S. 214C of the Income Tax Ordinance, 2001---Question before the High Court was whether Commissioner's power to conduct audit of any person under S. 120(1A) of the Income Tax Ordinance, 2001 was solely dependent upon Board's decision to select persons for audit under S. 214C of the Income Tax Ordinance, 2001 or could the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 make such a selection on his own discretion"---Held, that S. 120(1A) of the Income Tax Ordinance, 2001 vested in the Commissioner the power to select a person for audit if there existed reasonable grounds for doing so, irrespective of the fact that section 120(1A) of the Income Tax Ordinance, 2001 mentioned the words "conduct audit" and not to select a person for audit" and such power to conduct audit was granted to the Commissioner so that where he felt necessary, he could bring any assessment under scrutiny and it would be impossible to do the same if such power was considered to be solely dependent upon selection of persons by the Board under S. 214C of the Income Tax Ordinance, 2001 ----Second proviso to S. 177 of the Income Tax Ordinance, 2001 prohibited the Commissioner from conducting audit after expiry of six years whereas no such prohibition existed when persons were selected for audit under S. 214C of the Income Tax Ordinance, 2001---Limitation contained in second proviso of section 177 of the Income Tax Ordinance, 2001 was applicable to selection made by the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 but no such limitation was applicable when random selection was made under S. 214C of the Income Tax Ordinance, 2001 and the same showed that there exited two distinct provisions of the Income Tax Ordinance, 2001 on basis of which persons could be selected for audit, one was circumscribed by period of limitation and the other was not Power of the Board to choose persons for audit under S. 214C of the Income Tax Ordinance, 2001 was a general power which was in addition to power of the Commissioner under S. 120(1A) of the Income Tax Ordinance, 2001 and if the Commissioner was unable to conduct audit under said Section, then there would not exist any provision in the Income Tax Ordinance, 2001 which would facilitate the taxing authority to examine a tax return in case circumstances suggested conducting a person-specific audit and same could never be the intention of the Legislature---No provision of the Income Tax Ordinance, 2001 suggested that power to select a person for audit only vested with the Board---High Court observed that after examination of Ss. 120(1A), 122(5), 177 & 214C of the Income Tax Ordinance, 2001 it was clear that law visualized two distinct situations for conducting audit; and first was provided under S. 120(1A) of the Income Tax Ordinance, 2001 which was based on exercise of discretion on part of Commissioner and the other was the power of the Board to select persons or class of persons under S. 214C of the Income Tax Ordinance, 2001---Under S. 120(1A) of the Income Tax Ordinance, 2001 any person could be called upon by the Commissioner in his discretion to submit accounts for audit if reasonable grounds existed for doing so---Constitutional petitions were dismissed, in circumstances.

Anwar KaSltif Munztaz, Muhammad Usman Alam and Ammar Athar Saeed, for Petitioner.

Lubna Pervez for Petitioner.

Abid H. Shahan for Petitioner.

Muhammad Naeem Noor for Petitioner.

S. Irshad-ur-Rehman for Petitioner.

Kafeel Ahmed Abbasi for F.B.R.

Siddique Mirza for Respondents.

Javed Farooqui for Respondents.

Sarfaraz Ali Metlo for Respondents.

Altaf Mun for Respondent.

Ainuddin Khan, DAG.

Date of hearing: 25th August, 2015.

JUDGMENT

FAISAL ARAB, C.J.---In the Income Tax Ordinance, 2001, the procedure for conducting audit for tax purposes is prescribed in Section 177 and the person who has to conduct such exercise is the Commissioner. The only issue agitated before us by the counsel for the petitioners in all these connected petitions is whether Commissioner's power to conduct audit of any person under Section 120 (1A) of Income Tax Ordinance, 2001 is solely dependent upon Board of Revenue's decision to select persons for audit under Section 214C of the Income Tax Ordinance, 2001 or under Section 120(1A) the Commissioner in his own discretion can make such a selection.

2.There may arise an occasion and always does that accounts of a particular person are required to be audited in order to ascertain his correct income. Sections 120(1A) of the Income Tax Ordinance, 2001 can be examined to ascertain whether this Section facilitates the Commissioner to select persons for audit in his own discretion. In this regard, Sections 120(1), 120(1A), 177 and 214C of the Income Tax Ordinance, 2001 need to re examined and for the sake of convenience, these provisions are reproduced below:--

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

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

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

120 (1A) Notwithstanding the provisions of subsection (1), the Commissioner may conduct audit of the income tax affairs of a person) under section 177 and all the provisions of that section shall apply accordingly.

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

(3) .

(4) .

(5) .

(6) .

177 Audit.---[(1) The Commissioner may call for any record or documents, including books of accounts maintained under this Ordinance or any other law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is, kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the Purpose of investigation and proceedings under this Ordinance in respect of such person or any other person:

Provided that

(a)the Commissioner may, after recording reasons in writing call for record or - documents including books of accounts of the taxpayer; and

(b)the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer:

Provided further that the Commissioner shall not call for record or documents of the taxpayer after expiry of six bars from the end of the tax year to which they relate.

(2)

(3)omitted.

(4)omitted.

(5)omitted...

(6)After completion of the audit 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.

(8) .

(9) .

(10) .

(11) .

(12) .

(13) .

(14) .

(15) .

(16) .

(17) .

214C. Selection for, audit by the Board.---(1) The Board may select persons' or classes of persons for audit of Income Tax affairs'o through computer ballot which may be random or parametric as the Board may deem fit.

(2)Audit of Income Tax affairs of persons selected under subsection (1) shall be conducted as per procedure given in section 177 and all the provisions of the Ordinance, except the first proviso to subsection (1) of section 177, shall apply accordingly.

(3)For the removal of doubt it is hereby declared that Board shall be deemed always to have had the power to select any person or classes of persons for audit of Income Tax affairs.'

3.Section 177 and Section 214C when read together by no means suggest that the power of the Board to select persons for audit under Section 214C is the only mode of selection of persons for audit. It can be seen that Section 120(1A) begins with non-obstante clause thereby override the provisions of Section 120(1). This means that notwithstanding the fact that a tax return filed under Section 120(1) is taken as an assessment order, the Commissioner has been empowered to conduct audit under Section 120(1A) in case he might deem fit to do so and thereby can amend a tax return. Thus under Section 120(1A), a tax return which is taken to be an assessment order, can be reassessed and amended after conducting audit. Now this object can never be achieved if the Commissioner in his own discretion is unable to select a person for audit and has to necessarily depend only on the selection made by the Board of Revenue under Section 214C. In our view, Section 120(1A) does not in any way suggest that the power of the Commissioner to conduct audit is solely dependent upon selection of persons under Section 214C. Had the authority to select persons for audit been solely vested in the Board under Section 214C then there was no need to incorporate Section 120(1A). It can also be seen that under Section 177(7) a person can be audited again and again where there are reasonable grounds for doing so. Now the words 'where there are reasonable grounds for such audit' contained in Section 177(7) mean that through application of mind a decision is to be reached to audit a particular person. Obviously, it is the Commissioner, in whose mind, the reasonable grounds may emerge to conduct audit of a particular person. Had audit of a person been made solely dependent on Board's selection in i,-4ndom computer balloting then the words 'where there are reasonable grounds to such audit' contained in section 177(7) would become absolutely redundant. Thus, Section 120(1A), in our view, vests in the Commissioner, the power to select a person for audit if there exists reasonable ground for doing so, irrespective of the fact that section 120(1A) mentions the words `conduct audit' and not 'to select a person for audit'. This power to conduct audit is granted to the Commissioner so that where he feels necessary, he can bring any assessment under scrutiny. This would be impossible to do if such power is considered to be solely dependent upon selection of persons by the Board under Section 214C. Additionally, the second proviso to Section 177 prohibits the Commissioner from conducting audit after expiry of six years, whereas, there is no such prohibition when persons are selected for audit under Section 214C. Hence the limitation contained in the second proviso of Section 177 is applicable to selection made by the Commissioner under Section 120(1A) but no such limitation is applicable when random selection is made under Section 214C. This also shows that there are two distinct provisions of the Income Tax Ordinance, 2001 on the basis of which persons can be selected for audit, one is circumscribed by period of limitation and the other is not.

4.It was also argued that where person-specific audit is required to be undertaken, Section 122(5A) of the Income Tax Ordinance can be invoked and therefore invoking Section 121(1A) of the said Ordinance for selecting a taxpayer for audit was not justified. In order to address this argument, it is necessary to examine the scope of Section 122(5). For convenience sake Section 122 (5) is reproduced as under:--

"122(5) An assessment order in respect of a tax year, or an assessment year, shall only be amended under subsection (1) and an amended assessment for that year shall only be further amended under subsection (4) where, on the basis of definite information acquired from an audit or otherwise, the Commissioner is satisfied that?

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

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

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

5.In our view Section 122(5), when it refers to audit, does not facilitate in determining as to which authority is to make selection of persons for conducting audit. When it speaks of audit, Section 122(5) only facilitates in amending an assessment order on the basis of definite information that has been acquired from an audit that has already taken place. So power to select and conduct audit of a person does not emanate from Section 122(5). It has thus become evident that Section 122(5) by itself does not confer any power on the Commissioner in the selection of persons for audit. This can only be done, as discussed above, under Section 120(1A). If Section 120(1A) is interpreted in a manner that the Commissioner is not conferred with the power to decide on his own to conduct audit of a particular person then it means that audit has to be left to the decision of the Board of Revenue only under Section 214C.

6.The power to impose tax vests in the State. A taxpayer is accountable to the State for his incomes so that the leviable tax can be collected. State has every right to ensure that tax is properly calculated and paid. This obligation of a person to pay correct amount of tax means that a vested right has accrued to the State to examine the account books of a taxpayer. Audit of accounts is the most effective mode of determining the correct liability of tax. Right to conduct audit being absolute, it is hard to imagine that such a right could be left mainly to chance i.e. computer balloting or as and when the Board decides. The power of the Board to choose persons for audit is a general power which is in addition to the power of the Commissioner under Section 120(1A). How then could we hold that when the Commissioner wants to select a specific person to conduct audit, he does not have the discretion to do so under any provision of the Income Tax Ordinance, 2001. If the Commissioner is unable to select a person to conduct audit under Section 120(1A) then there would be no other provision in the Income Tax Ordinance, 2001, which would facilitate the taxing authority to examine a tax return and if circumstances suggest conduct person-specific audit. If we accept the interpretation of petitioner's counsel then a person-specific audit can never be possible even though a tax return may be required by the taxing authority to be scrutinized in detail. It may be true that frequent audit of the same person at times become a nuisance for him but to make such an effective tool to determine correct income inoperative just because Section 214C exists cannot be accepted. The Commissioner then would never be able to select a particular person for conducting audit though circumstances may exist where such a decision has to be taken. This can never be the intention of the legislature. Such an interpretation of Section 214C would make the provisions of Section 120(1A) utterly redundant. In this regard, following example can be quoted with considerable advantage. Example: Mr. X, a businessman is thought by the tax authorities to be involved in tax evasion. The Commissioner serves notice on him. Mr. X takes the stand that he is running his business at a loss which claim is not accepted. The Commissioner needs to audit his accounts in order to ascertain true income to Mr. X's business. If the Commissioner had to depend on the computer balloting or on the decision of the Board under Section 214C to conduct audit and does not have discretion of his own under any provision of Income Tax Ordinance, 2001 to select a person for audit then Mr. X's account may never come under scrutiny. If the power to conduct audit under Section 177 is made contingent upon only on Board's decision exercised under Section 214C then it means that Mr. X can lawfully deny audit of his account books unless his name 1ppears in the selection made by the Board. Such an interpretation of Sections 120(1A) and 214C would lead to disastrous consequences. No provision of Income Tax Ordinance, 2001 suggests that the power to select a person for audit, only vests with the Board of Revenue. Thus after examining the provisions of Sections 120(1A), 122(5), 177 and 214C of the Income Tax Ordinance, 2001, it clearly appears that the law visualizes two distinct situations for conducting audit. The first is provided under Section 120(1A) which, in our view, is based on exercise of discretion on the part of the Commissioner and the other is the power of the Board to select persons or class of persons under Section 214C. We are therefore of the view that by invoking Section 120(1A) any person can be called upon by the Commissioner in his discretion to submit accounts for audit if reasonable grounds exist for doing so. Hence no case for interference under Article 199 is made out.

7.Vide short order dated 25.08.2015 all these 47 connected petitions were dismissed and these are the reasons for the same.

KMZ/N-11/SindhPetition dismissed.