ISLAMABAD: The selection of income tax audit of various sectors by the Commissioners on the instructions of the Federal Board of Revenue (FBR) has been declared illegal by the Sindh High Court (SHC).
These sectors include auto, cement, beverages, oil marketing, and ghee/ cooking oil companies.
In this regard, the SHC has declared the FBR’s sectoral audit selection as illegal covering sectors of auto, ghee/ cooking oil industry, beverages, cement and oil marketing companies/ refineries.
The SHC has issued an order against the FBR’s sector-wise selection of cases for income tax audit.
The root cause of this bunch of 96 petitions is sectoral audit notices of the FBR, which triggered proceedings under Section 177 of the Income Tax Ordinance, 2001 (Ordinance 2001) on issuance of notices by Commissioner, violating rights of petitioners.
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According to the judgement of the SHC, since there is no independent application of mind in giving reasons for selection of the petitioners, rather it is dependent on the directions of the FBR, it does not demonstrate a transparent exercise of powers by the Commissioner under section 177 of Ordinance 2001. If the FBR can simply direct the commissioner to select any taxpayer for audit, then distinction between Section 177 and 214C would collapse and would make either of the two redundant, which principle cannot be applied, while interpreting the independent provisions of a Statute.
The Commissioner would thus become an instrument of the FBR, which may act as a predator of the legislative powers of the Commissioner under section 177 to achieve its desired result. The independence of the commissioner and the independent application of mind would lose its transparency, which would be against an independent structured mechanism of Ordinance 2001.
In relation to Section 4 of the FBR Act, 2007, as raised by Deputy Attorney General, Section 177(2AA) of Ordinance 2001 is not concerned with the sectoral audit. It merely states that where a taxpayer has been selected for an audit under section 177 but has not provided all the information required by the tax authorities or a sufficient explanation regarding defects in the record, the Commissioner shall determine taxable income on the basis of sectoral benchmark 17 ratios prescribed by the FBR. Phrase “Sectoral Benchmark Ratio” has been defined in the explanation of Section 177(2AA).
The SHC held that the sectoral benchmark ratios are therefore figures for various business metrics that must be used by the Commissioner to determine taxable income for a taxpayer where a taxpayer has been lawfully selected for audit but is unable to provide the relevant information, sufficient explanation for the record. Sectoral benchmark ratio does not concern with sectoral audit selection. It only empowers the Commissioner on an event when a taxpayer has failed to furnish record or documents including books of accounts or has furnished incomplete record or books of accounts or is unable to provide sufficient explanation regarding defect in relation to the documents or books of accounts on the basis of an independent procedure of Section 177 of Ordinance 2001. It is at this stage when the guidelines of sectoral benchmark ratios, as prescribed by the Board, could be adhered to.
The insistence of the FBR’s counsel for the dismissal of these petitions on the ratio of Allah Din’s case (Supra) is also misconstrued as the observations therein cannot be read in isolation.
The ratio of the Allah Din’s case was process of balloting from among pool of taxpayers objectively determined by the Board, whereas, in the instant case, sectoral audit was desired by the Board through Commissioner.
The order said that the Supreme Court clearly held that the petitioners therein, failed to show that the selection was arbitrary, mala fide or discriminatory. The implication being that if any of these facts exist then such actions are amenable. The present petitions are based entirely on the fact that the selection for the audit is arbitrary, mala fide, discriminatory and predatory in nature as the FBR trespassed beyond the statutory limits of Section 214-C directing the commissioner to conduct sector-wise audit, which is not permitted under the law.
Upshot of the said discussion is that the petitions categorised sector-wise are allowed on the above conclusion, the SHC order added.
Copyright Business Recorder, 2022
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