The Department has filed these three appeals against the combined order dated 24.08.2009 passed by CIT(A-II) Islamabad for the assessment year 2004 & tax years 2005 & 2006 on the following common ground:-
(i) That the learned CIR (A-ll), Islamabad was not justified in holding that selection of case for audit and order passed was illegal, without considering the facts narrated in the decision of Writ Petition No. 960/2008, dated 14.07.2009 of the Honourable Islamabad High Court, Islamabad.
Brief facts leading to these appeals are that the taxpayer is an individual who derives income from salary and private medical practice. Returns were filed declaring total income at Rs 450,400/-, Rs.
675,396/- & Rs. 1,180,160/- for the tax years under appeal. The case was selected for audit u/s. 177(4) oh the basis that the taxpayer has claimed at Rs. 500,503/-, Rs. 450,387/- & Rs. 1,427,263/- as expenses against the receipts declared from private medical practice at Rs. 450,400/-, Rs.
675,396/- and Rs. 1,180,160/- respectively for the tax years 2004, 2005 and 2006. Being dissatisfied with the treatment given by the Taxation Officer the assessee preferred appeal before the learned CIT(A) who after considering the facts and circumstances of the case held that selection of the case for audit was illegal. The observation made by the learned CIT(A) is reproduced hereunder:- "In view of the facts and circumstances of the case and in the light of the ratio of decision of the learned Lahore High Court, I am of the considered opinion that selection of the case for audit was illegal. Since the appeals are disposed of on legal ground, therefore, no other grounds are adjudicated upon".
Being dissatisfied with the treatment accorded by the learned CIR (A), Department has come up in appeal before the Tribunal on the ground raised supra.
3. During arguments learned DR has submitted that the taxpayer have challenged the selection of their cases for audit u/s. 177(4) of the Income Tax. Ordinance, 2001 by taking the grounds as follows:-
(i) Whether a notice was necessarily required to be issued before selecting a case for audit u/s. 177(4) of Income Tax Ordinance, 2001?
(ii) Whether the Commissioner could select a case for audit u/s. 177(4) without issuance of "audit selection criteria" by the FBR? (i.e. The interpretation of words "in addition to" appearing in the beginning of sub-section (4) of Section 177 of Income Tax Ordinance, 2001.
(iii) Whether mentioning of specific clause of subsection (4) of Section 177 of Income Tax Ordinance, 2001 was necessarily required for the purpose of selecting a case for audit?
The AR has contended that uptill today so many judgements of Higher Appellate Courts are in the field. In the presence of these judgments what is the status of these legal issues. The background of history of Section 177 and judgments are as under:-
(1) First time the selection u/s. 177 was made in the tax year 2003. The same was challenged in the Honourable High Courts through Writ Petitions. Apart from so many other judgments a judgment in case of Muhammad Hussain v. CIT was passed by the Lahore High Court reported as (2004) 90 Tax 81 (HC. Lah.)
(2) The said judgment alongwith many other judgments were assailed before Honourable Supreme Court of Pakistan through Civil Appeals No. 1962 to 2205 of 2005. The Honourable Supreme Court had decided the above cited appeal vide his judgment reported as (2006) 94 Tax 317 (SC. Pak) titled as Commissioner of Income Tax and others v. Fatima Sharif Textile,. Kasur & others. A principle was laid down by the Honourable Supreme Court that the issuance of notice is , mandatory. Relevant portion of judgment is as under:- "With the observation that let appellants issue fresh notices to the respondents in terms of Section 177 of the Ordinance, as it was prevailing at the relevant time, disclosing criteria/reasons for selecting their cases for purpose of audit."
(3) After Tax Year 2003 the department had not selected the cases for audit for new years. However 2/3 years back the selection of cases were again started. That through Finance Act, 2004 the Section 177 was amended and subsections (1), (2) and (4) were introduced which are reproduced as follows:- "[177. Audit:- (1) The [Board], may lay down criteria for selection of any person for an audit of person's income tax affairs, by the Commissioner.
(2) The Commissioner shall select a person for audit in accordance with the criteria laid down by the [Board] under sub-section (1).
(3) The [Board] shall keep the criteria confidential.
(4) In addition to the selection referred to in sub-section (2), the Commissioner may also select a person for an audit of the person's income Tax Affairs having referred to.
(a) the person's history of compliance or non-compliance with this Ordinance;
(b) amount of tax payable by the person;
(c) the class of business conducted by the person; and
(d) any other matter which in the opinion of Commissioner is material for determination of correct income."
(4) These current selections were again challenged before various Honourable High Courts throughout Pakistan. Islamabad High Court, Karachi High Court, and Different Benches of Lahore High Courts interpreted the Section 177 differently, not only the issue of Show-Cause Notice but also other issues.
(5) That the petitioners had raised four following objections:-
(a) Issuance of Show-Cause Notice.
(b) Selection of case under sub-section (4) without invoking the sub-section (2).
(c) Non-mentioning of sub-clauses of subsection (4) i.e. a, b, c or d.
(d) Basis and criteria of selection.
(6) That as explained above different High Courts interpreted the issues differently in their own way.
(7) That Islamabad High Court and Karachi High Court upheld, the selection in accordance with law and rejected the writ petitions/reference of the Taxpayers, citation are writ petitions No. 960 of 2008, 550 of 2009, 99 of 2009 and 1006 of 2009, dated 14.07.2009 (Islamabad High Court) and (2009) 99 Tax 272 (H.C. Karachi.).
(8) That Lahore High Court vide W.P. No. 2663/2007, dated 05.3.2008.
(2010). 101 Tax 177 (H.C. Lah.) i.e. W.P. No. 1858/2009 DATED 08.6.2009 W.P. No. 20306/2009, dated 18.10.2009.
W.P. No. 20339/2009, dated 16.10.2009.
W.P. No. 20340/2009, dated 16.10.2009 and (2009) 100 Tax 213 titled as Mohsin Raja v. Chairman FBR etc. Accepted the writ petitions of the taxpayer. In judgment of Mohsin Rana case the Honourable Lahore High Court Lahore accepted all the four objections of the petitioners.
The above three issues (questions of law) have been decided after elaborate discussion in favour of either party as follows:-
(1) By Mr. Justice Irfan Qadir, Lahore High Court dated 29.6.2009 in favour of the taxpayers and against the procedure as adopted by the department.
(2) By Mr. Justice M. Munir Peracha, Islamabad High Court dated 29.6.2009 through a Writ Petition No. 960 of 2008 decided in favour of the Department and against the appellants i.e. Taxpayers. This judgment is absolutely in contrast to that delivered by Mr. Justice Irfan Qadir, Lahore High Court as far as in interpretation of the above three points of law are concerned.
(3) Whereas another judgment of Lahore High Court issued by Mr. Justice Sheikh Azmat Saeed while deciding the Writ Petition No. 11166 of 2009 on 22.10.2009 has also interpreted the above three questions of law explicitly and unambiguously in favour of the department.
(i) In this judgment the Honourable Mr. Justice Sheikh Azmat Saeed has not specifically referred to the already delivered judgment by Mr. Justice Irfan Qadir through which the above three questions of law were interpreted but said that two single Benches of this Court had struck down the notice u/s. 177. However all of the issues dealt in case of Mohsin Raza v. Chairman FBR etc. Have been thoroughly discussed and answered otherwise.
(ii) It was held that there was no requirement of pre-selection notice for selection of a case for audit u/s.177(4) rather a notice u/s. 177(4) i.e. Intimation letter communicating reasons/basis of audit selection was enough. -
(iii) That a case could be selected for audit u/s. 177(4) without any criteria by the Board u/s. 177(1) of Income Tax Ordinance, 2001 i.e, criteria by the Board was not essential.
(iv) . The order says that mention of specific clause i.e. a, b, c or d of sub-section (4) of Section 177 of Income Tax Ordinance, 2001 is the jurisdiction basis, however, it has to be seen on a case to case basis after hearing each petitioner separately and granting them opportunity to produce the material to displace the case of the department.
(v) The most important point is that in this judgment/order of the famous case viz. "Fatima Sharif v.
CIT" decided by the Honourable Supreme Court of Pakistan has been made as the basis and it has been discussed in detail in para 16 on page 11)
(Para 17 on page 12) mentions that the portions pertaining to pre-selection notice were expunged and the Honourable Supreme Court of Pakistan observed that fresh notices be issued in terms of Section 177 of Income Tax Ordinance, 2001 as it was prevalent at the relevant time.
4. 99 Tax 272 Mohd. Umer v. CIT (Division Bench of High Court Karachi that no prior notice is required before selection of case for audit.
5. 94 Tax 317 of 2006, decided on 01.3.2006 (CIT v. Fatima Sharif Textiles Mills, Kasur) "That the department may issue notices in terms of Section 177 of Income Tax Ordinance, 2001 as it was applicable at the relevant time, disclosing criteria /reasons of selecting their cases for the purposes of audit.
Further citations in favour of department's point of view are as follows:-
(i) 2007 PTD 239 (H.C. Lahore)
(ii) 2009 PTD 20 (H.C. Lahore.)
(iii) 2009 PTD 284 (H.C. Lahore.)
(iv) 2007 PTD 2188 (H.C. Lahore.)
(v) 2008 PTD 1440 (H.C. Islamabad)
(vi) PLD 1963 Karachi 182
(vii) 2000 SCMR 1017
(viii) ICA # 1250 of 2007 (unreported)
(ix) W.P. #7146 of 2008 (unreported)
(x) W.P. # 2928 of 2008 (unreported)
INTERPRETATION OF THE WORDS "IN ADDITION TO" & "ALSO"
4. In case of Mohsin Raza v. Chairman FBR, etc. it is held that: "33. In a nutshell, the laying down of criteria selection of any person for his income for tax affairs in terms of sub-section (1) of Section 177 is an essential pre-requisite for the Commissioner to select a person for audit. Once the Commissioner has selected a case for audit in accordance with the criteria laid down by the Central Board of Revenue in terms of clause (1) of Section 177 then additionally, the Commissioner can also select a person for an audit of the person Income Tax affairs having regard to the factors enumerated in clauses (a), (b) and (c) of sub-section (4) of Section 177. It would be seen that sub-section (4) will come into play only when the Commissioner in the course of proceeding with the audit of a person under sub-section (2) of Section 177 discovers that in addition to the selection of person in sub-section (2) the Commissioner now requires to select another person for audit of Income Tax affairs. This is exactly what is envisaged in sub-section (4) of Section 177 wherein It is clearly mentioned that in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of Income Tax affairs. As such sub-section (4) of Section 177 is secondary in character in relation to subsections (1) and (2). It therefore follows that if sub-section (4) is not capable of being isolated from sub-sections (1) and (2), then clause (d) of sub-section (4) cannot also be detached from its preceding clauses or sub-sections.
34. This Court is therefore of the opinion that different clauses of Section 177 are interrelated and the sequence or order in which these have been mentioned by the Legislature in its wisdom must be observed by the executive authorities in letter and spirit as an obligation since each clause augments the order. Clause (d) of sub-section (4) of Section 177 cannot be isolated from its preceding clauses or sub-sections in a manner; that primary part of Section 177 becomes redundant in view of such isolation thereby paralyzing the main body of the provision in question in order .To make the residual or secondary clause extra potent.
In case of Writ Petition No. 11166 of 2009, dated 22.10.2009 passed by Mr. Justice Sheikh Azmat Saeed. Sub-section (4) of Section 177 of the Income Tax Ordinance, 2001 has been reproduced as follows:- "Section 4. In addition to the selection referred to in sub-section (2), the Commissioner may also select a person (or classes of persons) for an audit of the person's income tax affairs.
Stress has been laid down on the word 'also':
22. It appears to be the case of the petitioners that phrase 'in addition to' presupposes existence of criteria in terms of sub-section (1) of Section 177 of the Ordinance. In this behalf great emphasis has been laid on the meaning of the said phrase.
23. Learned counsels on both sides are in agreement that phrase "in addition to means "furthermore or moreover". However, learned counsels for the petitioners have lost sight of the word 'also' which occurs in sub-section (4) reproduced ibid, which as per Words & Phrases Permanent Edition means: besides, in addition thereto and too.
24. In view of above it is clear and obvious that provisions of sub-sections (1) and (4) are disjunctive and not conjunctive. A case can always be selected for audit on the basis of criteria as laid down by the FBR besides which and in addition thereto, persons can also be selected for audit by Commissioner under subsection 4 of Section 177 of the Ordinance. The plain reading of sub- section (4) leaves no room for any doubt that it clearly empowers the Commissioner Income Tax to issue notice on the basis of criteria spelt of in sub-clauses a, h, c and d of sub-section (4) of Section 177 of the Ordinance. Not only is the weight of authorities against the petitioners but also to accept the contentions of the learned counsels for the petitioners would require ignoring the word 'also' from the said provision. Unfortunately, for the petitioners they, cannot wash away any word from a provision. To accept the interpretation of the petitioners would require more violence to be done to the language of sub-section (4) than this Court Is prepared to do.
5. After hearing the arguments of the learned counsels at length and going through cited judgments of the higher Courts, we also feel that in the judgment Mohsin Raza v. Chairman FBR etc. Word "also" have lost sight. The rule of literal construction is that an interpretation which renders any part of provision as surplus-age in not correct. "A construction which would leave without effect any part of the language of a statute will normally be rejected". Provisions of sub-sections
(2) and (4) are disjunctive and not conjunctive. Sub-section (4) of Section 177 clearly empowers the Commissioner Income Tax to issue notice on the basis of criteria spell of in sub-clauses a, b, c and d of sub-section (4) of Section 177 of the Ordinance. This issue is accordingly answered in favour of the department and against the taxpayer.
PRE-SELECTION NOTICE:
6. In case of Mohsin Rana v. Chairman CBR etc. It was held that selection of a case for audit in itself tantamount to an adverse order since it undermines the sanctity of an assessment order issued by the Commissioner of Income Tax in terms of clause (b) of sub-section (1) of Section 120 of the Income Tax Ordinance, 2001. So pre-audit notice is an essential requirement since audit of person's income tax affairs result in prejudice being caused to the assessee. Who becomes subjected to scrutiny and that the return filed by him is re-opened. It is because of this reason that Honourable Supreme Court of Pakistan has always laid its utmost stress on strict observance of norms of natural justice in general and the principles of audi alterm parterm is to be lead in every statute and reliance in this regarding was placed on PLJ 2008 SC 1088, 2007 SCMR 330, 2005 SCMR 678, 2005 SCMR 1814 and PLD 2004 SC. 441.
7. On the other hand, Mr. Justice Sheikh Azmat Saeed is of the view that Section 177 of the Income Tax Ordinance, 2001 does not provide for a pre-selection notice. In the absence of an express provision in law words cannot be added to the statute so as to employ a notice to the Petitioner prior to invoking the Section 177 of the Income Tax Ordinance, 2001. It is One of the arguments of the learned AR that under the Income Tax Ordinance, 2001 return on filing is deemed to be an assessm ent and to reopen the same by selection and audit constitute action adversely effecting the rights of the assessee.
8. On the other hand the learned DR states that selection of audit does not mean deemed assessm ent order is going to be disturbed for example, if the selection of the case is on the basis of inflated expenses and the assessee shows the documentary evidence reflecting these expenses, the Commissioner can drop the proceedings of the audit subject to his satisfaction. It is not essential that if the case has been selected for audit; deemed assessment is to be disturbed and is to be amended at each and every cost. That is why that sub-section (6) of Section 177 provides a mandatory provision of notice and asking for explanation of the taxpayer on all the issues raised in audit. This is a stage where assessee can challenge the objection raised in audit on legal as well as on the factual side. The general practice is that after the selection of the case for audit, department sends intimation letter regarding selection of the case then as per audit manual initial conference comprising of one or more session is held to debate the controversy. If required IDR (Information Documentary Request) is sent for requesting requisite document as per standard operating procedure laid down in Audit Manual. Assessee has not been deprived of his natural right of being heard. Subsection (6) of Section 177 of the Ordinance 2001 specifically provides for the said right of furnishing explanation on all issues raised in the audit. Before making the final opinion to amend the assessm ent the department was required to issue notice to the assessee indicating therein the basis of proposed selection to confront them with relevant material and provide due opportunity of being heard as embodied in sub-section (6) of Section 177 of the Income Tax Ordinance, 2001.
Therefore, the interest of the taxpayers have been adequately safeguarded despite they were not heard by the Commissioner at an early stage. The rules of natural justice are not indexable. They yield to and change with the exigencies of different situations. They do not apply in the same manner to situations which are not alike. These rules are not cast in a rigid mould nor can they be put in a legal strait-jacket. They are not immutable but flexible. They can be adopted and modified by the Statutes. The need to act in an emergency may also exclude at least a prior hearing or where a decision affects so many people that a hearing would be impracticable. Depending upon the facts and circumstances of each case, there is no mandatory requirement of natural justice that in every case the other side must be given a notice before preliminary steps are taken. It might suffice if reasonable opportunity of hearing is granted to a person before an adverse action or decision is taken against him. However, it is not possible to lay down an absolute rule of universal application governing all situations as to the exclusion or otherwise of the audi alteram partem rule during the course of preliminary inquiries or investigations. In the case of Parry Jones v. Law Society and others (supra), the Court of Appeal took the view that where the only inquiry was as to whether there was prima facie evidence, natural justice did not require that the party should be given notice of it. In Christopher John Moran (supra), the Court of Appeal observed that it was no good for the tactician to appeal to the rules of natural justice. They had no application to a preliminary inquiry of that kind. The inquiry was made with a view to seeing whether there was a charge to be made. It did not do anything which adversely affected the concerned or prejudiced him in any way.
It was simply a preliminary hearing to see if there was going to be a charge. In Rees and others (supra), it was held by the Privy Council that there were many situations in which natural justice did not require that a person must be told of the complaints made against him and given a chance to answer them at the particular stage in question. Essential features leading the Courts to that conclusion had included the fact that the investigation was preliminary, that there would be a full chance adequately to deal with the complaints later, that the making of the inquiry without observing the audi alteram partem maxim was justified by urgency or administrative necessity. In Liberty Oil Mills v. Union of India (AIR 1984 SC 1271), an order of investigation was challenged on the ground of non-compliance with the principles of natural justice. The Supreme Court of India observed that procedural fairness embodying natural justice was to be implied whenever action was taken affecting the rights of parties. An opportunity to be heard might not be pre- decisional; it might necessary have to be post-decisional where the danger to be averted or an act to be prevented was imminent or where the action could break to delay. In Union of India v. Tulsi Ram Patel (AIR 1984 SC 1416). It was observed that right of prior notice could be excluded where the same would obstruct the taking of prior action, in Lewis v. Heffer and others (1978 3 All E.R. 354), the National Executive Committee of Labour Party had suspended the Constituency Officers and Committee pending inquiry without affording opportunity of hearing or issuance of Show-Cause Notice. In Wednesday Corporation v. Minister of Housing and Local Government (1905 1 All E. R. 186), the Minister's action to issue instructions to the Inspectors as regarding scope of inquiry was held to be not subject to hearing. In Hardutt Mull Jute Mills v. State of Bihar (AIR 1957 Patna 21), a learned Division Bench of the Patna High Court while dealing with a wealth tax case held that as a matter of law it was not correct to say that the party adversely affected should be heard at each and every stage of administrative process. In the judgment of the Karachi High Court reported as (2009) 99 Tax 272 (S.C. Kar.) Division Bench the issue in question has already been answered in favour of the department. If the choice is between two interpretations the one that fails to achieve the manifest purpose of the legislation shall be discarded in favour of the one that produces an effective result.
A corollary of this principle is that of the two interpretations, one that produces smooth working of the system would be preferred over that which would introduce uncertainty, friction or confusion into the system. The recent judgment of the Honourable Lahore High Court in Writ Petition No. 11166 of 2009 vide order dated 22.10.2009 being chronologically later in the order has to prevail in which the reported judgment of the apex Supreme Court of Pakistan as (2006) 94 Tax 317 (S.C. Pak) in the case of Commissioner of Income Tax & others v. Fatima Sharif Textile, Kasur & others has been discussed in detail and ultimately it has been held that pre-selection notice is not essential.
Undoubtedly, while sitting in the subordinate forum wisdom of the upper forum in interpretation is to dominate. This forum is not supposed to make any interpretation in contrary to that upper forum rather obey the same. Exclusion of prosecution notice is essential for effective and smooth workability. It is not of of place to mention here that a number of writs were filed only on the legal ground enabling taxpayer keeping the Court in dark on the factual side. Extraordinary jurisdiction can be invoked only on legal ground and on the mixed question of law and facts. If a brief scenario of fact alongwith legal implication is presented before the Court order passed will be having complete subjective assessm ent of each issue. I am within my domain to refer above-said fact in view of harmonious and effective workability of Income Tax Law. Court never intends to deprive the assessee to refute the version of the department. This right of assessee is protected in sub-section
(6) of Section 177 as well as in Section 122(9) of Income Tax Ordinance, 2001. So it is held that pre- selection notice is not necessary.
BENEFICIAL INTERPRETATION.
9. The learned counsel for the taxpayer has insisted that there are two interpretations, one favourable to the assessee is to prevail, he has referred a number of judgments of this Tribunal which were decided following the authoritative judgment in the case of Mohsin Rana v. Chairman FRR, etc.; reported as (2009) 100 Tax 213. Needless to mention here that Appellate Tribunal being subordinate forum has to comply the dicta of the superior Courts. At that lime, the judgment of the Honourable Lahore High Court in the case of Mohsin Rana v. Chairman FBR, etc., reported as (2009)
100 Tax 213 being the latest on the subject was in the field. The cases of the assessee falling under the jurisdiction of the Honourable Lahore High Court were to be treated as per dicta laid down by the Honourable Lahore High Court. Now in view of the latest judgment in Writ Petition No. 11166 of 2009 vide order dated 22.10.2009, present position is that all the judgments throughout the Pakistan are in favour of the department as enumerated supra. Where the judgments of the same forum with the same strength are in contrast to each other. Then definitely the judgments being later in time is to be followed due to concept of curative philosophy.
NON-QUOTATION OF SUB-CLAUSES A. B, C & D OF SECTION 177(4).
10. As far as the issue of non-quotation of sub-clauses a, b, c and d of Section 177(4) is mother provision embodying different sub-clauses. Learned DR contends that if intended action is confronted; then non-mentioning of the sub-clause will not be fatal. The Taxpayer has tried to defeat genuine tax demand on technicalities that sub-section has not been quoted. I would like to reproduce Section 126(2)(a)(b) as under.
126. Evidence of assessm ent. (1)..........
(2) Any [order] of assessm ent or other document purporting to be made, issued, or executed under this Ordinance may not be-
(a) quashed or deemed to be void or voidable for want of form; or (b.) affected by reason of any mistake, defect, or omission therein.
"If it is, in substance and effect, in conformity with this Ordinance and the person assessed, or intended to be assessed or affected by the document, is designated in it according to common understanding."
As per learned DR, substance intended to be assessed has been specifically confronted to the assessee. I am not agreement with the learned DR because the conditions and parameters sot forth in sub-clauses a. b, c and d of sub-section (4) of Section 177 of the Ordinance are the jurisdictional basis, non-existence whereof is a sine qua non for selection of a person for audit. The existence of such jurisdictional basis must necessarily be determined before power can be exercised. This determination can only be effected after hearing the petitioners and granting them opportunity to produce the material to displace the case of the respondents, which exercise can only be undertaken on an individual case to case basis. Thus though the respondents may very well issue notice purportedly under Section 177(4) of the Ordinance but whether in fact and in law respondents were entitled to exercise the powers conferred thereby and whether such powers have in fact been exercised within the. Parameters prescribed by law can always be challenged by the petitioners by responding to the notice including by objecting to the jurisdiction and authority of the Commissioner to issue the same. Needless to add that any objections raised would require to be adjudicated upon through a speaking order. If the very jurisdiction to issue such notice is challenged then obviously as is settled law, the question of jurisdiction would require to be dealt with and decided first before the Commissioner can proceed further in the matter.
11. The Taxpayer's explanation on all the issues raised in the order including issue of the jurisdiction will be answered in yes or no, either the proceedings of audit are to be dropped or Commissioner can proceed to amend the assessm ent under sub-section (1) or sub-section (4) of Section 122. This order can be independently passed under sub-section (6) of Section 177 or objection raised by the taxpayer can be answered by discussing in detail in Show- Cause Notices issued u/s. 122(9) of the Income Tax Ordinance, 2001. Whatsoever it is detailed discussion is to be made to refute the explanation/objections raised by the taxpayer.
ASSESSMENT YEARS 2004 & 2005.
12. The selection of the case for audit for Tax Years 2004 & 2005 is not sustainable on the ground that clause (1A) of Section 120 was inserted in the Ordinance through Finance Act, 2005 relevant to tax year 2006 onward and not applicable to the tax years 2004 and 2005. For ready reference clause (1A) of Section 120 is reproduced as under:-
120. Assessm ents.- (1A) Notwithstanding the provisions of subsection (1), the Commissioner may selected a person for an audit of his Income Tax affairs u/s. 177 and all the provisions of that Section shall apply accordingly.
The learned DR contends that Section 122 of the Ordinance empowers the Commissioner to amend the assessm ent. Sub-section (1A) was inserted in Section 120 by Finance Act, 2005. By insertion of sub-section (1A), the legislature conferred a power in addition to the powers u/s. 122 already possessed by the Commissioner." Thus going into the discussion of the applicability of this Section being retrospective or prospective is not the issue for the reasons that the Commissioner already possessed the power to select a case for audit u/s. 177. I am not in agreement with the contention of the learned DR. It is pertinent to mention here that undoubtedly Commissioner may amend any assessm ent u/s. 120 or 121. He can do so on definite information acquired through audit or otherwise. For resorting to audit, powers have to flow from sub-section (1A) of Section 120 because Section 177, as was at relevant time, clarifies as to how Commissioner shall select a ease for audit; it will be according to the criteria laid down by Federal Board of Revenue or in addition to this he may also select a case for audit with regard to person's history, quantum of tax payable, class of business or where it is essential to determine correct income. I am of the view that. Original powers flows from sub-section (1A), of Section 120 and Section 177 provides procedure in detail as to how these cases will be selected. In the law no provision can be considered as surplus or superfluous.
Primary jurisdiction to select a case for audit flows from sub-section (1A) of Section 120 and Section 177 of the Income Tax Ordinance explains procedure and touchstone, as to how these cases will be selected. Section 177 is a procedural or the machinery Section. Sub-section (1 A) of Section 120 empowers the Commissioner to select any person for audit of person's income tax affairs u/s.177. It was a lacuna in the law which has been filled later on through Finance Act, 2005. Similarly sub- section (4) of Section 177 was inserted in the Income Tax Ordinance, 2001 through Finance Act, 2004 relevant to tax year 200^ onward and not applicable to the tax year 2004. Taxpayer is to be dealt in a tax year as per law enforceable for that tax year. Law cannot be applied retrospectively. Hence the selection of the case for tax years 2004 & 2005 is nullity in the eyes of law. Departmental appeals for tax years 2004 & 2005 are rejected. Amended assessments! Have rightly been annulled while original deemed assessm ents for these two years shall stand restored.
ASSESSMENT YEAR 2006.
13, In this scenario departmental appeal for the tax year 2006 is remanded to the learned Commissioner Audit to confront substance of intended action to Taxpayer and provide him opportunity lo furnish explanation then after passing the speaking order u/s. 177(6) of Income Tax Ordinance, 2001, he can proceed to amend assessment in accordance with law if it warrants. So the departmental appeal for the tax year 2006 is disposed of in the manner as indicated above.
Sd/- (MUNSIF KHAN MINHAS)
JUDICIAL MEMBER Sd/- (ISTATAAT ALI)
ACCOUNTANT MEMBER Dissenting Note
14. With all respect for my learned brother (the Judicial Member), I do not subscribe to the analysis/observations about a judgment of Hon'ble Lahore High Court contained in para-5 of this order. I also do not agree with the observations conclusions and findings which are not in conformity with the following criteria selection of cases for audit laid down vide Tribunal's order dated 15.4.2010 in the case of Mr. Marius Bercea Sorin c/o M/s. Schlumberger Seaco Inc, v.
Commissioner of Income Tax (Legal), Regional Tax Office, Islamabad in I.T.A. No. 940/IB/2009 (Tax Year 2008):- "9. We have considered arguments of both the sides. For selection of cases fur audit u/s. 177 (4), the main issues raised by the taxpayer are (i) whether a notice was necessarily required to be issued before selecting a case for audit (ii) whether the Commissioner could select a case for audit u/s. 177 (4) without issuance of "audit selection criteria" by the FBR? (i.e. The interpretation of words "in addition to" appearing in the beginning of sub-section (4) of Section 177 of the Income Tax Ordinance, 2001 and (iii) whether mentioning of specific clause of subsection (4) of Section 177 of the Income Tax Ordinance, 2Q01 was necessarily required for the purpose of selecting a case for audit?
10. The Hon'ble Lahore High Court, in their judgment reported as [(2009) 100 Tax. 213 (H.C. Lah.) titled as "Mohsin Raza v. Chairman FBR etc.", decided these issues in favour of the taxpayers and held that selection of cases for audit will not be lawful, if a pre-selection Show-Cause Notice is not given and if selection is made without issuance of audit selection criteria by FBR and that mentioning of specific clause of Section 177(4) is also necessary. In all other judgments of High Court level, especially the judgment of Hon'ble Islamabad High Court dated 14.07.2009 in W.P. No. 960 etc. And the judgment of Hon'ble-Karachi High Court reported as (2009) 99 Tax 272 (H.C. Karachi-Division Bench), the issue in question was decided in department's favour and it was held that pre- selection Show-Cause Notice u/s. 177(4) is not required. Moreover, the Commissioner can also select cases for audit irrespective of issuance of audit selection criteria by FBR and mentioning of specific clause of Section 177(4) was not necessarily required. In a recent judgment of Hon'ble Lahore High Court dated 22.10.2009 in W.P. No. 11166 of 2009, the aforesaid issues were clearly and unequivocally settled in favour of the Department. Now the Department contends that this judgment, being chronologically later in the order, holds the field and prevails at the present. In our opinion, varying judgments on the same issues have been given by two Benches of Lahore High Court, whereas Hon'ble Islamabad High Court and Karachi High Court have decided the issues in dispute in Department's favour Moreover, latest judgment of Hon'ble Lahore High Court dated 22.10.2009 in W.P. No. 11166 of 2009, being chronologically later in order, also has prevailing effect. In these circumstances, we are of the opinion that it is not necessary for the Department to issue a pre-selection Show-Cause Notice. Moreover, the Commissioner is also competent to select cases for audit and mentioning of specific clause of 177 (4) is not essentially required. Nevertheless, the judgment of Hon'ble Supreme Court of Pakistan reported as (2006) 94 Tax 317 (S.C, Pak.) in the case of Commissioner of Income Tax & others v. Fatima Sharif Textile, Kasur & others has also a binding effect. It was held by the Hon'ble Supreme Court in this case that while selecting a case for audit, the Department should intimate the taxpayer about it and criteria/reasons of selection of the case for audit, should also be disclosed.
11. It has now crystallized that Hon'ble Supreme Court in their judgment in the case of Commissioner of Income Tax & others v. Fatima Sharif Textile, Kasur & others settled that while selecting a taxpayer's case for audit, the Department should intimate him about it and also disclose the criteria/reasons of selection of the case for audit. In our opinion, this condition is still obligatory in nature in the present scenario. It is incumbent upon the Department that if the case of any taxpayer is selected for audit, an intimation should be given about such selection to the taxpayer and criteria/reasons of such selection should also be communicated. In the instant case, this requirement was duly fulfilled. The Department, while intimating the taxpayer about selection of his case for audit, also disclosed the criteria/reasons of selection. An intimation letter was duly issued through which the taxpayer was informed, that his case has selected for audit, because claim of exemption from lax had to be examined. In this manner, legal requirements for selection of the case for audit as spelled of by the Hon'ble Supreme Court of Pakistan in their judgment in the case of Commissioner of Income Tax & others v. Fatima Sharif Textile, Kasur & others were duly fulfilled by the Department. The instant case was, therefore, lightly selected for audit and objections raised from taxpayer's side about selection of his case for audit are not maintained. Appeal of the taxpayer against selection of his case for audit, being devoid of any merit, is rejected".
15. Selection of this case for audit has to be approved The case be remanded to CIT(A) for adjudication of other grounds of appeal which were not adjudicated by him.
16. Following question is proposed to be referred to the third referee:-
(a) Whether or not following of procedure and passing of order u/s. 177(b) in the light of above- mentioned paras 10 & 11, for tax year 2006 is mandatory?
(b) Whether findings about defective selection of the case for audit for tax years 2004 & 2005 are legally correct?
Sd/- (ISTATAAT ALI)
ACCOUNTANT MEMBER Sd/- (MUNSIF KHAN MINHAS)
JUDICIAL MEMBER As per Syed Nadeem Saqlain. Judicial Member
17. The subject appeals have been entrusted to me as referee member by the worthy Chairman to resolve the difference of opinion having arisen between my two learned brothers. In this regard, following questions have been framed by the learned members for resolution of difference of opinion:-
(i) Whether or not following of procedure and passing of order u/s. 177(6) in the light of above- mentioned paras 10 & 11, for tax year 2006 is mandatory? And
(ii) Whether findings about defective selection of the case for audit for tax years 2004 & 2005 are legally correct?"
18. While the facts of the case have been very well elaborated by the learned Judicial Member in the judgment proposed" by him, it is deemed appropriate that underlying facts are succinctly explained hereinafter alongwith respective findings given in respect thereof by both my learned brethren so as my view thereon can be expressed clearly and explicitly.
19. For tax years 2004 through 2006, taxpayer has assailed the amendment orders passed under Section 122 of the Income Tax Ordinance, 2001 (referred to as 'Ordinance' hereafter) after conducting audit under Section 177 of the Ordinance, on the basis of following grievances:-
(i) Since, Federal Board of Revenue had not specified the criterion for audit required to be laid down u/s. 177(1) of the Ordinance, selection of its case for audit under Section 177(4) of the Ordinance was illegal as held by honourable Lahore High Court through order dated 29.6.2009 reported as (2009)
100 Tax 213;
(ii) As no pre-selection notice was issued by concerned Commissioner, Audit, the very initiation of audit proceedings lacked the requisite legal sanctity;
(iii) Notices issued under Section 177(4) of the Ordinance were improper as these did not mention the basis on which selection for audit was being made i. e. Various reasons for audit mentioned in Clauses of this legal provision were not mentioned in the notices; and
(iv) For the years 2004 & 2005, selection for audit was legally flawed as in the statute applicable in respect of such tax years, provisions of sub-Section (1A) of Section 120 of Ordinance were not present and thus audit jurisdiction could not be assumed in respect of assessment deemed to have been completed under Section 120 of the Ordinance.
20. An analysis of finding recorded by my learned brethren reveals that there is no difference of opinion amongst themselves in respect of taxpayer's pleas explained at (i) & (ii) above and, in my view, both have unanimously concluded that these cannot be entertained in view of judgment dated October 22, 2009, delivered by Mr. Justice Sheikh Azmat Saeed of honourable Lahore High Court in Writ Petition No. 11166 of 2009 now also reported as 2010 PTD 571.
21. Nevertheless, in respect of latter two grounds taken by taxpayer in support of its case, both have differed with each other in the following manner:
(i) Learned Judicial Member has concluded that specific Clauses of Section 177(4) of the Ordinance were required to be mentioned by Commissioner, Audit as these laid down the available 'jurisdiction' and thus audit proceedings were not valid and should be remanded back. However, since,, proceedings for tax years 2004 and 2005 were quashed by him as explained in (ii) below, he has recommended for remanding back the proceedings for tax year 2006 to the Commissioner, Audit. On the other hand, learned ,, Accountant Member has repelled such objection deriving strength from an earlier judgment of this Tribunal in ITA No. 940/IB/2009 (Tax Year 2008) and has endorsed the departmental action; and
(ii) Learned Judicial Member is of the view that powers to amend an assessment order, deemed to have been, issued under Section 120 of the Ordinance, originally flow from sub-section (1A) of Section 120 of the Ordinance, brought onto the statute book through Finance Act, 2005 and since Section 120(1A) was not there in the statute during the period relevant to tax years 2004 and 2005, amendment carried of by department, after conducting an audit 'under Section 177 of the Ordinance, was not valid. While, learned Accountant Member has neither discussed his stance/ point of view in respect of above explained findings nor has he cited any authority to controvert these, a question has been framed as to validity of these observations depicting the fact that he is not in agreement there with.
22. Each of the matters in respect whereof variant findings have been recorded by learned brethren, as explained above, are deliberated, in detail, separately hereunder:-
(i) Issuance of Audit Notice without mentioning the clauses of Section 177(4) of the Ordinance.
23. I have gone through the authorities cited by taxpayer, the department, learned Judicial Member as well as the learned Accountant Member. Learned Judicial Member, while holding that mentioning of specific Clause of Section 177(4) of the Ordinance under which case was being selected for audit, has derived strength from judgment of Lahore High Court reported as 2010 PTD
571. On the other hand, learned Accountant Member has advanced a varied view on the strength of an earlier judgment of this Tribunal in ITA No. 940/IB/2009 (Tax Year 2008),
24. In order to further elaborate the difference that arose. Between my learned brethren, I deem it appropriate that respective findings, whereupon both have rested their case, are reproduced hereunder: 2010 PTD 571 (LHC)
"....30. It has also been noticed that the objections raised on behalf of individual petitioners go to the very heart to the jurisdiction purported to have been exercised by the respondents with issuance of the impugned notice under Section 177(4) of the Ordinance. The conditions and parameters set forth in sub-clauses (a), (b), (c) and (d) of sub-section (4) of Section 177 of the Ordinance are the jurisdictional basis, the existence whereof is a sine qua non for selection of a person for audit. The existence of such jurisdiction basis must necessarily be determined before such power can be exercised. This determination can only be effected after hearing the petitioners and granting them opportunity to produce the material to displace the case of the respondents, which exercise can only be undertaken on an individual case to case basis. Thus though the respondents may very well issue notice purportedly under Section 177(4) of the Ordinance but whether in fact and in law respondents were entitled to exercise the powers conferred thereby and whether such powers have in fact been exercised within the parameters prescribed by law can always be challenged by the petitioners by responding to the notice including by objecting to the jurisdiction and authority of the Commissioner to issue the same. Needlessly to add that any objections raised would require to be adjudicated upon through a speaking order. If the very jurisdiction to issue such notice is challenged then obviously as is settled law, the question of jurisdiction would require to be dealt with and decided first, before the Commissioner can proceed further in the matter by commencing the intrusive process of audit.
31. The upshot of the above discussion is that this Court is not persuaded to strike down the impugned notices under Section 177(4) of the Ordinance. However, the petitioners would be at liberty to respond thereto and raise any and all objections including but not limited to the absence of jurisdiction by filing their replies. Such objections would require to be adjudicated upon through a speaking order after providing fair opportunity of hearing to the petitioners, and such adjudication must precede the audit. (emphasis is added)
ITA No. 940/IB/2000 [Tribunal] In our opinion, varying judgments on the same issues have been given by two Benches of Lahore High Court, whereas Hon'ble Islamabad High Court and Karachi High Court have decided the issues in dispute in department's favour. Moreover, latest judgment of Hon'ble Lahore High Court dated 22.10.2009 in W.P. No. 11166 of 2009, being chronologically later in order, also has prevailing effect. In these circumstances, we are of the opinion that it is not necessary for the Department to issue a pre-selection Show-Cause Notice. Moreover, the Commissioner is also competent to select cases for audit and mentioning of specific clause of 177(4) is not essentially required (emphasis is added)
25. A perusal of above reproduced findings makes it clear that difference between my learned brethren is attributable to the interpretation of judgment of honourable Lahore High Court reported as 2010 PTD 571. Learned Judicial Member is of the view that ratio of such judgment is that Commissioner should specify the specific clause of Section 177(4) of the Ordinance so as taxpayer may raise any objection as to assumption of jurisdiction, which could then be addressed by Commissioner through passing of an order under Section 177(6) of the Ordinance. Placing reliance on such judgment, he has opined that since above explained process must precede audit, the matter should be remanded to Commissioner, Audit for adherence to the directions issued by Lahore High Court.
26. On the other hand, learned Accountant Member has based his view on the above-quoted judgment of this Tribunal whereby it has been opined that mentioning of specific clause of Section 177(4) of the Ordinance is not mandatory upon the Commissioner, Audit.
27. I consider that judgment of honourable Lahore High Court, ratio of which is being differently understood, is clear and unambiguous. It has been unequivocally held by honourable High Court that assumption of jurisdiction under Section 177(4) of the Ordinance must be clearly spelled of and taxpayer be given an opportunity to object to such assumption as the case may be. This clearly means that non-mentioning of clauses of Section 177(4) of the Ordinance cannot be condoned as it tantamount to denial of a statutory right to the taxpayer. Obviously, if a taxpayer does not know that on what basis his case has been selected for audit, he cannot come up with his view as to legality of jurisdiction and no finding as to any such objection can be brought on to the record by the Commissioner. This would mean that whole process spelled of in above reproduced para 31 of judgment of Lahore High Court will not be complied with.
28. Since, there could be no second opinion as to the fact that judgment of Lahore High Court is required to be followed, I consider that audit proceedings not being initiated and concluded in accordance with directions issued by honourable Lahore High Court cannot be validated.
29. Accordingly, it is held that the Commissioner, Audit recommences the audit proceedings in respect of subject tax years i.e. Tax years 2004 through 2006 by clearly mentioning the Clause of Section 177(4) of the Ordinance under which jurisdiction is intended to be assumed and conclude the audit proceedings after following the procedure directed to be adopted by the Lahore High Court. It is clarified that learned Judicial Member has ordered for adoption of above explained procedure only in respect of tax year 2006, as for tax years 2004 and 2005, he has invalidated the audit proceedings ab initio on a different pretext. As explained below, since I do not subscribe to views expressed by learned Judicial Member in respect of tax years 2004 and 2005, I have cautiously held that the matter in respect of all the three tax years be remanded to Commissioner, Audit for adjudication afresh in accordance with directions of honourable Lahore High Court.
(ii) Relevance of provisions of Section 120(1 A) of the Ordinance in respect of tax years 2004 & 2005
30. Learned Judicial Member has based his findings on the fundamental principle that no legal provision in a statute can be considered as superfluous or surplus. In my view, he is of the opinion that while through Sections 122(1) and 122(5) of the Ordinance, Commissioner was authorized to amend an assessm ent order inter alia on the basis of an .'audit', it remained unresolved that whether department could assume jurisdiction for audit in respect of an assessment Order 'deemed' to have been issued under Section 120 of the Ordinance.
31. In other words, it is the view of the learned Judicial Member that while a mandate to 'amend' a deemed assessm ent was available to department under Section 122(5) of the Ordinance inter alia on the basis of an 'audit', the mandate to conduct an 'audit' of a taxpayer, in respect whereof a 'deemed assessm ent' has already been made, was not available to the department up until July 1, 2005 when such jurisdiction was made available through insertion of sub-section (1A) in Section 120 of the Ordinance. In the event, such a view is endorsed; the expression 'audit' employed, by legislature in provisions of Section 122(5) of the Ordinance would have to be rendered as being redundant. This is so because such an interpretation would effectively mean that since:
(i) 'mandate' to conduct an audit of a 'deemed assessment' was non-existent; and
(ii) every return of income filed by a taxpayer was a deemed amendment order.
Any 'amendment' on the basis of 'audit' was an impossibility and thus expression 'audit' used in Section 122(5) of the Ordinance was a redundancy and Section 177 of the Ordinance was surplus or at least ineffective up until July 1, 2005. I feel no cavil in holding that such a position cannot be endorsed as it would injure and violate the basic tenet of statute interpretation viz. Redundancy cannot be attributed to legislature.
32. I do not find myself convinced to subscribe to this argument especially in the circumstances that not only detailed procedure as to conduct of an audit was laid down in the statute (in the form of Section 177 of the Ordinance), as also agreed to by the learned Judicial Member, but also the department was authorized to give effect to findings noted during the course of 'audit' by way of amending the deemed assessm ent through invocation of powers available under Section 122 of the Ordinance. In such a situation, if it is concluded that while legislature laid down the procedure for conduct of an audit (under Section 177 of the Ordinance) and authorized the department to amend a deemed assessm ent on the basis of an audit (under Section 122 of the Ordinance), no mandate to conduct an audit in respect of a deemed assessment was vested with the department, it would imply that a whole administrative scheme contained in Ordinance would have to be considered ineffective and surplus.
33. Accordingly, such an interpretation would lead one to the same cul-de-sac of of which learned Judicial Member has attempted to come of i.e. How could a provision of law be rendered as 'superfluous' or 'surplus'. It is quite relevant to place on record here that the relevant provisions of law i.e. Sections 120, 122 and 177 of the Ordinance had remained a subject of extensive litigation in the recent past and these provisions have undergone appellate/judicial review upto the highest level i.e. Honourable Supreme Court of Pakistan. The judgments laid down by higher appellate authorities in this respect reveal that the jurisdiction as to conduct of an audit was never questioned on the strength of the position that sub-section (1A) of the Section 120 of the Ordinance was inserted through Finance Act, 2005 and thus such a mandate did not exist earlier than the effective date of. Such insertion. I feel no hesitation in expressing my inability to question upon the wisdom of apex Court and other higher appellate authorities which, after having conducted a detailed review of these legal provisions, have not come up or endorsed the view expressed by learned Judicial Member. I consider that it cannot be considered as an omission and the ratio laid down by such authorities is that provisions of Section 120(1 A) of the Ordinance does not cast any doubt as to availability of audit jurisdiction to Commissioner prior to insertion of such provisions in the statute.
34. In the emerging scenario, it becomes apparent that instead of concluding that jurisdiction to conduct 'audit' of taxpayers did not exist prior to insertion of sub-section (1A) in Section 120 of the Ordinance, an attempt has to be made to give a pragmatic interpretation to such legal provision and reconcile it with the overall scheme of law contained in the Ordinance. In my view, sub-section (1A) of Section 120 of the Ordinance was clarificatory in nature and was aimed to elaborate that passing of deemed assessm ent order should not be so construed that it prejudices the administrative domain as to review of such assessment by way of conducting an audit. This position finds strength from the fact that not only 'audit' procedure was laid down in Section 177 of the Ordinance, but department was also empowered to give effect to audit findings through invocation of powers conferred upon it under Section 122 of the Ordinance. Such a position would ensure that whole scheme of self-assessment and administrative authority to review it later on remains intact and legally valid and no violence is done to a piece of legislation. The upshot of above discussion is that audit proceedings for tax years 2004 and 2005 were legal and did not suffer from statutory infirmity highlighted by learned Judicial Member.
35. Amendment orders in respect of all the three tax years are vacated and Commissioner Audit is directed to recommence the audit proceedings, if required, after following the procedure spelled of in honourable Lahore High Court's judgment reported as 2010 PTD 571, as explained above.