The Lahore High Court (LHC) has granted stay against withholding tax recovery proceedings, initiated by field formations of Federal Board of Revenue (FBR) directly under section 161 of the Income Tax Ordinance- 2001 and Rule 44(4) of the Income Tax Rules-2002, without prior selection of case for audit.
It is learnt here on Sunday that a taxpayer engaged in business of vehicles through a Lahore-based tax lawyer Waheed Shahzad Butt, Advocate, had challenged the direct recovery proceedings under section 161 of the Ordinance through notices under Rule 44(4) of the Income Tax Rules- 2002, issued by IRS officials of RTO-I Lahore, wherein after hearing parties stay has been granted by the LHC with the directions that operation of the impugned notices shall remain suspended.
LHC observed and admitted the crucial question since in the case at hand there is no prior selection for audit under section 214C of the Ordinance and there is no notice under section 177(1) to produce books of account, therefore, proceedings under section 161 cannot be initiated directly by the assessing authority like the respondent without prior selection of case for audit of income tax affairs of the petitioner under section 214C of the Ordinance.
Tax lawyer added that present move by the field formations of FBR, specifically RTO-I Lahore, was an attempt to generate additional revenue to meet budgetary targets without realising the legality of proceedings. Considering the whole scheme of the Ordinance, independent proceedings under Section 161 cannot be initiated unless and until there is selection for audit and, thereafter, under section 177(1) of the Ordinance, the concerned commissioner may call for any record or documents, including books of accounts maintained under the Ordinance, for conducting audit of income tax affairs of a taxpayer.
The petitioner states "Petitioner being a law-abiding taxpayer duly fulfilled its legal obligations under the fiscal laws to submit tax returns, including income tax returns and withholding tax statements, without any default. Petitioner is under legal obligation, to deduct and collect tax at the time of making payments in the light of provisions of the Ordinance. Petitioner taxpayer was complying all the relevant provision of the Ordinance, firstly by deducting the due income tax at the time of making payments under the relevant provisions of the Ordinance, secondly by depositing the income tax in the manner provided to the credit of the federal treasury and thirdly by reporting all such accounting transactions to the respondents. Petitioner taxpayer submitted its annual return of total income in respect of tax year 2012 in the manner provided under the law within prescribed time. The return of income, so furnished, was also accompanied by annual audited accounts duly certified/audited by Chartered Accountants. Subsequently to filing of return of total income for the period July 2011 to June 2012 ie, period relevant to tax year 2012 and regularly filing of monthly withholding tax statement and after expiration of a period of more than two years and two months from the last date of closing period, the respondent, all of a sudden issued a void notice, requiring reconciliation statement under Rule 44(4) of the Income Tax Rules, 2002.
As per the law laid down by the Lahore High Court in Chen One Stores Ltd. Vs the Federal Board of Revenue etc, the power of selection for audit rests with the FBR and the concerned commissioner can only conduct audit, but not selection of audit, having no power to select a taxpayer's case for audit. The petitioner's case for the tax year 2012 was never selected by the FBR, but with some mala fide intention respondent issued direct notice without following the law in letter and spirit.
Proceedings under section 161 cannot be initiated directly by the assessing authority like respondent without prior selection of case for audit of income tax affairs of the petitioner under section 214C of the Ordinance. Considering the whole scheme of the Ordinance, independent proceedings under Section 161 cannot be initiated unless and until there is selection for audit and, thereafter, under section 177(1) of the Ordinance, the concerned commissioner may call for any record or documents, including books of accounts maintained under the Ordinance for conducting audit of income tax affairs of a taxpayer.
Act of respondent to issue direct notices is, in fact, selecting the petitioner for audit of its tax affairs, is not only illegal, but also violative of Constitution of Pakistan, hence, a nullity in the eyes of law. Amendments brought about in the three fiscal statutes, through Finance Act, 2010 namely; Section 214C of the Income Tax Ordinance, 2001, Section 42B of the Federal Excise Act and Section 72B of the Sales Tax Act, 1990 empower only FBR to select cases for audit and the powers of the field formations have been restricted and reduced to mere conducting of the audit of the taxpayers, after the cases have been selected by the FBR", the petitioner pleaded.
LHC in its order dated 17.11.2014 issued directions that respondents shall file para-wise comments to reach this court before the next date of hearing. Notice shall also be issue to the Attorney General of Pakistan. Till the next date of hearing, operation of the impugned letter dated 27.08.2014 shall remain suspended.
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