The Federal Board of Revenue (FBR) has directed field formations that the statutory audit framework under section 177 of the Income Tax Ordinance 2001, together with the overreaching umbrella of constitutional guarantees, furnishes adequate and sufficient safeguards to the taxpayer where there is possibility of overstepping by the tax authorities. Sources told Business Recorder that the FBR in recent past issued instructions to the Chief Commissioners Inland Revenue and Director General Intelligence and Investigation Inland Revenue on the important points regarding selection of cases for audit. Sources referred to the FBR's instructions on important points regarding selection of cases for audit. They said that while observing that certain guideline have been given by the lower fora, the Supreme Court has observed that though the guidelines could be useful for the Board to follow, it is not the function of the courts to enter into the administrative domain of the Department so the guidelines have been termed as directory and not mandatory or binding in the formulation of policies by the Board.
According to sources, another issue raised was that the audit policy gives unbridled discretion to the audit officers. The court has negated the claim by observing that policy is quite elaborate and sets out requisite methodology as well as guidelines for audit including procedure and timelines, etc. The apprehension that auditors would focus more on revenue than complying with tax law in order to meet performance evaluation indicators, has also not found favor with the court which has held that to ensure important factors for audit, standards for consistency are within the domain of FBR that must be kept in mind. It has been observed that statutory framework u/s 177 "together with the overreaching umbrella of constitutional guarantees furnishes adequate and sufficient safeguards to the taxpayer where there is possibility of overstepping by the tax authorities."
The FBR said that referring to the subject and to say that, while disposing of CPLA, in a recent leave refusal order in CPs No. 2370-L and others, etc, on appeal from judgment/ order of Lahore High Court, Lahore, dated 18.07.201 7 passed in ICAs 126312017 etc, following very important principles/observations have been re-iterated/made by the Supreme Court of Pakistan namely:-
Selection for audit: To a challenge to selection for audit for tax year 2014 under the Audit Policy 2015 formulated to undertake the audit, it has been held that "We have repeatedly held that mere selection for audit does not cause an actionable injury to the taxpayer," and that conducting of audit is merely to check/verify the accuracy, truthfulness and veracity of declarations made under self assessment regime. So mere selection of audit by itself is not a complete process, which may or may not culminate in revision/amendment of assessment necessarily. The court has observed that a self-assessment regime in which confidence is reposed in the taxpayer, audit is to provide a system of checks and balance to ensure just, fair and transparent declarations by the taxpayer.
Selection process of audit: Regarding objections by the taxpayers that selection process is discriminatory for its exclusion of certain classes of taxpayers to the detriment of other classes of persons, it has been held that Board has the powers to select certain classes of persons through a computerized random ballot and that taxpayer's argument that " random ballot means that entire body of Taxpayers must be included in the ballot is misconceived and based upon erroneous and incorrect reading and understanding of the law." No irregularity has been observed in the random selection process by the Board. Rather it has been termed as transparent policy uniformly applied in accordance with law and neither any bias, arbitrariness or partially has been attributed nor a particular class of person has been targeted.
Audit without framing rules: As regards objections with respect to audit being carried out without framing rules as required by the DHA judgment, the court has observed that the DHA judgment is not applicable in random ballot selection. Random and parametric selections are different in nature and methods, "Rule applicable to one cannot be applied to other." It has been further held that no elaborate rules were required for random selection "being pure and simple computer aided selection".
Unstructured discretion in audit: Another issue raised was that the audit policy gives unbridled discretion to the audit officers. The court has negated the claim by observing that policy is quite elaborate and sets out requisite methodology as well as guidelines for audit including procedure, timelines etc. The apprehension that auditors would focus more on revenue than complying with tax law in order to meet performance evaluation indicators, has also not found favor with the court which has held that to ensure important factors for audit like uniform, standards for consistency are within the domain of FBR that must be kept in mind.
Time limitations: On the question of putting a bar by the lower fora to complete audit within a stipulated timeframe and the department's objection against putting such a bar, it has been held by the court that questions of completion time of audit cannot be left open ended and that the audit must be completed within a reasonable timeframe as spelt out explicitly in the Audit Policy 2015. On the issue of ability of the department to conduct quality audit within short time period the court has held that the taxpayers cannot be burdened with the ordeal of prolonged audit and that issues and problem regarding delays in conducting audit primarily are due to capacity and shortage of trained audit officers. The Board is expected to enhance the qualitative as well as quantitative capacity of the audit teams.
In the final analysis, it has been held that "general timeframe is necessary" so as to avoid abuse, misuse and hardships to the taxpayer. Timeframe of completion of audit of a tax year in the same financial year in which it is selected for audit as provided in the Audit Policy is fair and reasonable. However, in case of any eventuality beyond the control of the department, the timeframe can be extended by the Board through a reasoned order on a written request for extension explaining reasons for inability to complete the audit within the stipulated time. The extension so granted by the Board should not be casual, repeated as a matter of routine.
Directions by the court: While observing that certain guideline have been given by the lower fora, the court has observed that, though the guidelines could be useful for the Board to follow, but it is not the function of the courts to enter into the administrative domain of the Department so the guidelines have been termed as directory and not mandatory or binding in the formulation of policies by the Board.
The order of refusal of the SCP along with write-up have been uploaded on FBR's site for guidance and ready reference in all similar issues confronted by field formations in future.