The Lahore High Court recently declared that the audit notices under sections 177, 25 and 46 of the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005, respectively, issued by the Commissioner purportedly calling for the record of the taxpayer for selection of cases for audit is unconstitutional, illegal and without lawful authority.
Sources told Business Recorder on Sunday that 425 writ petitions on common legal issue of Audit Selection were decided by Justice Syed Mansoor Ali Shah, vide single order in Writ Petition 393/2012 with the observation that Section 177(1) of the Income Tax Ordinance, 2001, Section 46(1) of Federal Excise Act, 2005 and Section 25(2) of Sales Tax Act, 1990 are read down and shall provide the machinery provision to conduct audit after the taxpayer is selected for audit of its tax affairs by the Federal Board of Revenue (FBR) through computer ballot which may be random or parametric.
The LHC declared that the taxpayer will first be selected for audit by the FBR and only then would the Commissioner conduct its audit in accordance with procedure given in Section 177 of the Income Tax Ordinance 2001. The LHC said that the audit notices issued by the Commissioner, in fact selecting the petitioners/taxpayer for audit of their tax affairs, are illegal.
A prominent tax expert Waheed Shahzad Butt told this correspondent about the brief facts of these writ petitions. Notice under Section 177(1) of the Income Tax Ordinance, 2001 for the Tax Year 2010 has been served on the petitioner by the concerned Commissioner Inland Revenue whereby the petitioner has been practically selected for audit of its tax affairs and asked to furnish record for further verification. Similarly, taxpayer has been served with a composite notice for audit under Section 25 of the Sales Tax Act, 1990 and Section 46 of the Federal Excise Act, 2005 by the concerned Commissioner Inland Revenue, selecting the taxpayers for audit for period between July, 2009 and June 2010 precisely the period relevant to Tax Year 2010. All these audit selection notices issued under sections 177, 25 and 46 of the Income Tax Ordinance, 2001, Sales Tax Act, 1990 and Federal Excise Act, 2005 respectively have been challenged under article 199 of the Constitution before the LHC.
Waheed Butt also said that the grievance of the petitioners is that the impugned notices issued by the concerned Commissioners Inland Revenue directing petitioners to produce record for the tax years amounts for selecting them for audit of their tax affairs.
Selection of a taxpayer for audit of its tax affairs without an objective criteria offends the equality clause and thus not permissible under the law. The 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 FBR to select cases for audit and the powers of the Commissioner have been restricted and reduced to mere conducting of the audit of the taxpayers, after the cases have been selected by the FBR.
While defending the stance of Commissioner Inland Revenue to issue audit selection notices, the department stated that the selection of a case or calling of record for audit in no way causes any prejudice to the interest of a taxpayer as audit is nothing but a verification of the correctness of the share of the state and meant to safeguard the proper interest of the state.
In the broader sense audit of a taxpayer is only a way to safeguard the interest of more than 180 million people of the country, represented by the government through their chosen representatives and any method whatsoever employed to hamper the process of audit will not only cause prejudice to the State but also be a direct infringement of the rights of 180 million people.
The tax expert explained that petitioners contended that investigative powers of the tax regulator are almost the same as provided in the previous Income Tax Ordinance, 1979. The only difference in the two legislative frame works is that, under the new Income Tax Ordinance, 2001, the tax return filed by the taxpayer is deemed to be an assessment order under section 120 of the Ordinance. It is strange that under sections 120, 121, 122, 174, 175 and 176 there are immense powers with the department to investigate the affairs of the taxpayer. The audit function is a neutral and impartial inquiry to assess the effective compliance of the tax system.
After the insertion of the amendments through Finance Act, 2010 it is the FBR that enjoys the exclusive power to select a person for audit of its tax affairs and the powers of the Commissioners are to conduct the audit once the selection is made. Selection for audit, being a substantaitve power, is enjoyed by the FBR, while the procedural power of conducting the audit rests with the concerned Commissioners Inland Revenue. The power of selection has been withdrawn from the Commissioner and it is evident from the deletion of the selection criteria provided in Section 177(4) [(a) to (d)] of the Income Tax Ordinance, 2001. As long as, the Commissioner Inland Revenue was permitted under the law to make the selection of a person for audit of its tax affairs, he was also provided with a statutory objective criteria to regulate the selection process.
The new income tax law is modelled on the Universal Self Assessment Scheme (USAS). The tax return filed by a taxpayer under section 120(1)(b) of the Income Tax Ordinance, 2001 is taken to be an assessment order issued by the Commissioner, the day the return is furnished. The new system is based on trust and assumes that the taxpayer will disclose full particulars of his income, he maintained.
The LHC announced: "I am, therefore, inclined to save the statute and read down Section 177(1) (except its first proviso) and interpret it to be subservient to section 214C. Therefore, while the substantive power to select a person for audit is provided in Section 214C, the machinery provision providing procedure for conducting the audit is in section 177. The taxpayer will first be selected for audit under Section 214C by the Federal Board of Revenue and only then would the Commissioner conduct its audit in accordance with procedure given in section 177.
"For the above reasons, the impugned notices issued by the Commissioner under sections 177, 25 and 46 of the Income Tax Ordinance, 2001 Sales Tax Act, 1990 and Federal Excise Act, 2005 purportedly calling for the record of the petitioners but in fact selecting the petitioners for audit of their tax affairs are declared unconstitutional, illegal and without lawful authority and therefore, set aside," the High Court ruling said.