On the basis of my thirty years of tax practice I can assure you that the abuse of the under-mentioned three lines contained in Section 122(5A) have caused more problems to the taxation system than any other provision of the law that is or has remained in force.
Section 122(5A) of the Income Tax Ordinance, 2001
(5A)Subject to sub-section (9), the Commissioner may, after making, or causing to be made, such enquiries as he deems necessary, amend, or further amend, an assessment order, if he considers that the assessment order is erroneous in so far it is prejudicial to the interest of revenue.
Finance Minister Shaukat Tarin is to be complemented for addressing the issue under consideration and the tax department, unlike their past practice, after being guided by the Income Tax Appellate Tribunal through a very reasonable order, have introduced a very positive amendment in the taxation laws in the Finance Bill 2021.
It is my earnest request that the system as envisaged, be implemented in a manner that abuse of this law that kept the whole country hostage for over 75 years despite the correction in law 20 years ago, is not repeated.
One of the most positive of steps of the Musharraf Government was the introduction of a Universal Self-Assessment Scheme for tax purposes. On the Recommendation of the Shahid Hussain Report (2001) Income Tax Ordinance, 1979 was repealed and Income Tax Ordinance, 2001 was promulgated. This law was effective from Tax Year 2003.
The only real effective change in the taxation system was abolition of the incorrect system of self-assessment as laid down in the repealed Ordinance of 1979 and introduction of a proper and well drafted real self-assessment scheme.
Under this scheme all returns filed, under Section 120 of the Ordinance, 2001; irrespective of any condition, were treated to have been assessed. In practical terms ‘taxation officers’ were screened out of the system. Like all civilized societies a system of ‘Audit’ has been laid down and in any case selected for ‘audit’ the income could be amended. The process of audit was envisaged in Section 177 of the Ordinance read with Section 122(5) of the Ordinance. In all the cases where there was no ‘audit’ undertaken, there was no involvement of the taxation officer and whatever was declared was legally bound to be accepted. It was natural that the corrupt in the tax machinery and non-genuine tax advisors were not happy with this primary correction in the law. What happened afterwards is narrated in the following paragraphs:
I reiterate some of the tax officials and those advisors who are engaged in wrong practices were not happy with this very positive provision in the taxation laws. Accordingly, despite heavy resistance on a conceptual level, a sub-section was placed in Section 122 by way of Section 122(5A) where the Commissioner was empowered to amend the self-assessed income if there is an error prejudicial to the interest of revenue.
This concept was replicated from the Section 66A of the repealed Income Tax Ordinance 1979 [Section 236 of the Indian Income Tax Act, 1961]. This subsection was placed without realizing that Section 66A, as will be explained in the following paragraphs, could only be applied when there is something on record as regards proceedings of that assessment and in the case of a self-assessment under Section 120 of the 2001 Ordinance there is no such record of proceedings. It is to be clearly understood that a return of the taxpayer is not the ‘record of proceedings’; it is only a record. A commissioner can only find an error in the record of the proceedings not in the record. This concept is different from a rectification of error floating on record which can be corrected under Section 221 of the Ordinance, 2001.
Even after the insertion of Section 122(5A) the sanctity of self-assessment was technically kept alive as there was no ‘mechanism’ available for the taxation officer to undertake ‘fishing enquiries’ and amend the assessment. This was not acceptable to the corrupt mindset of some taxation officers and those advisors whose only business is to act as touts and blackmail the people at large in the name of taxation officers.
The final blow was made in Section 122(5A) by the insertion of the words “after making, or causing to be made, such enquiries as he deems necessary” in subsection 122(5A). With the insertions of these words and sentences through the Finance Act, 2012 unbridled, uncontrolled, illegal, wrong and absurd powers were provided to the taxation officers to disturb any self-assessment. Resultantly, after 2012, all the positive changes envisaged by Income Tax Ordinance, 2001 were effectively destroyed and as a practitioner and Chairman FBR I observed that almost 100 percent of the cases are spoiled or harassed in the name of Section 122(5A).
The epitome of this character arose in the case of one of my clients, Meezan Bank Limited, when there were two orders in the field for two years. One under Section 177 (Audit) and other under Section 122(5A) where every word, sentence, conclusion, proceeding was the same. The primary question I raised before a full bench of the Income Tax Appellate Tribunal is whether or not Section 122(5A) has been rightly applied and if so then what is the relevance of Section 177. The Income Tax Appellate Tribunal gave a landmark unanimous judgement and decided that fishing enquiries cannot be made whilst undertaking Section 122(5A) and at the same time they provided guidelines for the same. In my view the answer to my question was complete quashing of order under Section 122(5A). In my view the Bench was constrained as the provision relating to enquiry existed in the law at that time therefore Tribunal gave a little space.
The remarkable action undertaken in the Finance Bill 2021 is removing the right to make the enquiry. In other words, deleting the word placed by the Finance Act, 2012. If this deletion would have been there at the time of Meezan Bank Order the position would have been much clearer. Now through the Finance Bill 2021 the real spirit of self- assessment and importance of assessment has been revived and it should be our effort that such positive actions are not spoiled.
In the following paragraphs I would like to discuss the following three issues which are generally confused on the matter of Section 122(5A) of the Ordinance:
Is Section 122(5A) pari-materia with Section 66A?;
Should the taxpayer be provided unlimited latitude to intentionally file erroneous or prejudicial to interest of revenue returns? and;
What measures are undertaken in other countries where there is a concept of universal self-assessment position?
Is Section 122(5A) pari materia with Section 66A?
It is a completely wrong notion that Section 122(5A) is pari materia to Section 66A of the repealed Income Tax Ordinance, 2001. This confusion arises only on account of the use of common words. It is erroneous insofar as it is prejudicial to the interest of revenue. It is correct that both use the same words; however, the application is completely different as the ‘preceding process’ through which the Commissioner reaches that conclusion is not there. Section 66A was the outcome of the Section 62 of the repealed Ordinance, 2001 where there was an ‘application of mind’, or in other words, an ‘assessment’ or ‘audit’ was done and there was record of those proceedings. The superior power Inspecting Assistant Commissioner was given the power to inspect those ‘records of proceedings’, not being ‘record’ to correct if there is an error. In the case of Section 120 of the Ordinance, under the present ordinance, there is no ‘record of proceedings’ therefore the question is the manner of proceedings under Section 122(5A) if it has to be retained. This issue has been dealt with in the answer to the next question.
Should the taxpayer be provided unlimited latitude to intentionally file erroneous or prejudicial to interest of revenue returns?
If, for argument’s sake, Section 122(5A) is removed from the law, which is also the author’s view, then there will always be a question in that situation: what inbuilt mechanism have to be placed to ensure that taxpayer do not intentionally file erroneous returns and take the advantage of either escaping of being caught or deferring the liability till the matter is picked up by the audit? A similar situation will also arise for matters where the taxpayer has lost at appeal stages in one year and the matter is pending in appeal in the following years. In other words, there will always be some matters where there has to be some checks on the taxpayers also.
When I was the Chairman FBR I had already asked the people at the Board to examine the international practices and introduce the same as equitable treatment be meted out to both sides. In this connection, it will be interesting to read the comparative section of the Indian Income Tax Act, 1961, where this issue has been taken up nicely. It should be clearly understood that in India, unlike Pakistan there is still no universal self-assessment scheme and they follow what we used to do under the repealed Income Tax Ordinance, 1979.
Section 263 of the Indian Income Tax Act, 1961
Revision of orders prejudicial to revenue.(1) The Principal Commissioner or Commissioner may call for and examine the record of any proceeding under this Act, and if he considers that any order passed therein by the Assessing Officer is erroneous in so far as it is prejudicial to the interests of the revenue, he may, after giving the assessee an opportunity of being heard and after making or causing to be made such inquiry as he deems necessary, pass such order thereon as the circumstances of the case justify, including an order enhancing or modifying the assessment, or cancelling the assessment and directing a fresh assessment.
b) “record”shall include and shall be deemed always to have included all records relating to any proceeding under this Act available at the time of examination by the 1 Principal Commissioner or Commissioner;
Explanation 2.— For the purposes of this section, it is hereby declared that an order passed by the Assessing Officer shall be deemed to be erroneous in so far as it is prejudicial to the interests of the revenue, if, in the opinion of the Principal Commissioner or Commissioner,—
(c) the order has not been made in accordance with any order, direction or instruction issued by the Board under section 119; or
(d) the order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.
For the sake of clarity, subjects not relevant to the discussion have been taken out from the above excerpt.
The gist of the section, other than the concept that it is the follow up of an order by the taxation officer, is that the Indian tax law has compulsorily made the two kinds of orders, referred above as erroneous and definitely liable to be amended under Section 263 of the Act. An identical approach is required to be applied in Pakistan. In countries where there is a universal self-assessment scheme there is a manner to apply that position which has to be introduced in Pakistan. For example, a taxpayer cannot be allowed to defer a claim for which he has lost the case at the appellate level. Such situations are necessarily deemed to be errors prejudicial to the interest of revenue.
What measures are undertaken in countries where there is a concept of universal self-assessment position?
In all the countries where there is universal self- assessment is in force there is one prescribed form along-with the return. This is called ‘Statement of Aggressive Tax Position’. In this statement, the taxpayer declares that in the tax position the aggressive considerations have been adopted for the certain identified matters. For example, an expense that has been treated as capital by the appellate authorities is taken as revenue for the reason that the matter is pending before the next appellate stage. Both sides do not want to revert to their position. Once so declared the taxation authorities without resorting to audit or any other process by resorting to proceeding under section similar to Section 122(5A) amend the order and recover the tax also allowing the taxpayer to pursue the matter in appeal. This is what 122(5A) is meant for and is required to be used for.
Situation on the Ground
On the basis of my practical experience on both sides of the table there is a large joint venture between some corrupt tax officers and a section of tax advisors to abuse various provisions of the Income Tax law with a view to perpetuating harassment and the results of positive amendments are not achieved. The application of Section 122(5A) is an example. It took twenty years to achieve any sensibility. In this process even some organized cases are involved which indirectly assist the tax department in meeting their targets by resorting to 122(5A). However, as explained in a three-part series of articles titled “We seem to have no understanding of what ails our taxation system” in this newspaper? I explained that on a national basis these efforts which lead to overall harassment do not lead to any major contribution to national exchequer. Tax collection from these measures, even after this outrageous harassment is below par, as rightly identified by finance minister Shaukat Tarin. Such abuse, maladministration and misapplication of law is to be avoided. I would request my professional colleagues to support the government in its noble effort.
Copyright Business Recorder, 2021