Sections 177 and 214C of Income Tax law: Structured procedure for audits by IR explained

ISLAMABAD: The Appellate Tribunal Inland Revenue (ATIR) has explained a structured procedure for conducting audits by Inland Revenue officials under sections 177 and 214C of the Income Tax Ordinance, 2001.

This important judgement has been issued by a two-member bench of ATIR, Division Bench-I.

Let this order be sent to Member (Operation) and Member(Legal) Federal Board of Revenue (FBR) for the purposes of issuing instructions to all assessing officers to ensure compliance with the aforementioned legal provisions, procedures, directions, and their mandatory nature.

They should also be apprised of the serious consequences that will follow for any officers who fail to strictly adhere to these provisions and procedures, the ATIR order added.

A tax expert explained the ATIR judgement that the process includes issuing intimation letters, reviewing records, addressing discrepancies with taxpayers, and preparing a comprehensive audit report. The judgment underscores the legal basis for actions such as best judgment assessments under Section 177(10) read with Section 121 when taxpayers fail to provide the required records. Additionally, it critiques deficiencies in a specific audit report, stressing the importance of a clear structure, detailed findings, proper legal references, taxpayer acknowledgment, and adherence to procedural requirements to ensure transparency, fairness, and enforceability.

The ATIR order stated that the titled appeal was transferred by the learned Commissioner of Inland Revenue (Appeals-I), Islamabad, on September 18, 2024, under Section 126A(4) of the Income Tax Ordinance, 2001, as the assessed tax value in this case exceeds 20 million rupees.

Consequently, this tribunal is now tasked with deciding the appeal.

The appellant contests the impugned order dated February 29, 2024, issued by the assistant commissioner of Inland Revenue, Unit-AEIO-2, Range-AEOI, LTO, Islamabad for the tax year 2018, based on the grounds detailed in the memo of appeal.

The ATIR order stated that we have carefully considered the arguments presented by the representatives of both sides and thoroughly reviewed the available records.

The core legal issue in the present appeal pertains to the interpretation of Section 177 of the ordinance.

Specifically, the question is whether, after the production of records and related documents, the conduct of an audit, issuance of an audit report upon the conclusion of audit proceedings, and seeking explanations from the taxpayer on all issues raised during the audit are prerequisites for the Assessing Officer to assume jurisdiction under Section122 of the ordinance.

To ensure compliance with the above provisions of the Ordinance and to properly conduct an audit, the assessing officer should follow a structured and legally-compliant process. The ATIR has explained steps in sequence for conducting an audit either selecting the case of the taxpayer under Section 177 or 214C of the ordinance, followed by the necessary steps for completing the audit proceedings.

The ATIR now address the objection raised by the learned AR for the appellant concerning the so-called audit report issued under Section 177(6) read with Section 177(10) of the ordinance. This report was communicated via bar-coded notice and is incorporated on impugned order dated February 29, 2024. The audit report exhibits substantial issues in both its substance and structure, which may undermine its validity and its compliance with the principles of transparency, fairness, and procedural integrity.

A detailed analysis of the deficiencies in the report is provided, the ATIR stated.

The ATIR found that the addition of Rs98,103,385 as un-reconciled credit entries is not supported by factual evidence and contains significant computational errors. Based on the detailed review and the documentary evidence provided, the purported un-reconciled amount is incorrectly assessed and should be excluded from the appellant’s taxable income. Consequently, the addition to this account is hereby deleted.

In light of the said discussion, the impugned order passed by the assessing officer is legally untenable and is therefore annulled, the ATIR order added.

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