Messrs Northern Bottling Company (Private Limited) Industrial Estate Jamrud Road, Peshawar through its Secretary has filed instant writ petition against Letter No. 245 dated 28-2-2011 of the Commissioner Inland Revenue (Audit-II) Regional Tax Office, Peshawar, informing him to submit documents/information under Section 177(1) of the Income Tax Ordinance, 2001, (hereinafter called the Ordinance) to the ACIR IX Audit Division-II, who will be conducting audit of his Income Tax affairs under Section 177(2) of the Ordinance ibid. The petitioner was further asked by the Deputy Commissioner Inland Revenue to submit all the relevant documents/information as required from him by the Commissioner.
2. Brief facts of the case are that the petitioner company filed its annual Income Tax Return for the Tax Year 2009 declaring total income of Rs. 92,52,838 which was treated to be an assessment by the concerned Commissioner of Inland Revenue in terms of Section 120 of the Ordinance. No notice of any deficiency in the said Return was issued or served on the petitioner company in terms of sub-section (3) of Section 120 of the Ordinance within the stipulated time i.e. 30-6-2010. However, quite belatedly i.e. after about more than one year of filing of the Income Tax Return, the alleged letter/notice was issued by the Commissioner Inland Revenue (Audit-II) intimating that case of the petitioner company had been selected for audit in terms of Section 177 of the Ordinance.
3. The assertion of petitioner company is that Section 177 of the Ordinance has been amended and also a new Section 214-C has been added to the Income Tax Ordinance, whereunder the Commissioner Inland Revenue is not competent to issue such a notice to the petitioner-company and that selection of the case of petitioner company for the Tax Year 2009 in the year 2011 is illegal in terms of the Federal Board of Revenue letter issued vide C.No. 4(36)ITP/2002 dated 5-10-2009 wherein the Board has directed that there is no justification to select a case for audit for multiple tax years (current year as well as the previous years), as this practice causes undue harassment to the taxpayers.
4. We have heard the rival submissions and perused the relevant material on record.
5. The sum and substance of the arguments on behalf of petitioner's company is that if the Commissioner was going to select the case of petitioners for audit for the Tax year 2009, a notice should have been issued within the stipulated period i.e. upto 30-6-2010 and issuance of such a, notice on 28-2-2011 would be deemed to have been issued under the amended Section 177 of the Ordinance, whereunder the power of selection for audit of a taxpayer case rests with the Board and not the Commissioner.
6. The Lahore High Court in the case of Messrs Cheone Stores Limited v. Federal Board of Revenue (2012 PTD 1815)- has 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. It was observed 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 Court 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 Hon'ble Court; said that the audit notices issued by the Commissioner, in fact selecting the petitioners/taxpayers for audit of their tax affairs, are illegal.
7. In this case notice under Section 177(1) of the Income Tax Ordinance, 2001 for the Tax Year, 2009 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.. 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 amendment brought about in the fiscal statute, through Finance Act, 2010 namely; Section 214-C of the Income Tax Ordinance, 2001, empowers the 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 notice, the learned counsel on behalf of 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. It was further stated that the legislature made appropriate amendments in Section 177 of Income Tax Ordinance, 2001 and in Section 120(1 A) of Income Tax Ordinance, 2001 to meet the legal requirements in this regard. However, the FBR is only bound to select tax cases for detailed audit of income tax through computer ballot which could either be random or parametric. The selection of cases for audit by the Federal Board of Revenue
(FBR) through computerized balloting has confirmed that the jurisdiction for selection of cases for audit only rests with the Board, and not with the Commissioner Inland Revenue.
8. Under the repealed Income Tax Ordinance, 1979, the CBR, by exercising its powers as provided under Section 59, had specified self-assessment scheme with complete mode of selection of cases for audit. The mode, method or procedure for selection of cases for audit had never created any controversy or litigation. After introduction and enforcement of Income Tax Ordinance, 2001 from July I, 2002 to-date the issue regarding mode and procedure for selection of cases for audit could not be settled for the very reason that the FBR officials are not interested to act in accordance with true spirit of law, rather they intend to act as per their own intent and not as per the intent of the legislation. To make the point more clear it would be appropriate to reproduce hereunder the relevant provisions of Section 177 of the Income Tax Ordinance, 2001 as were at relevant point of time.
Section 177 (1) The commissioner may select a person for an audit of the person's income tax affairs having regard to:-- the person's history of compliance or non-compliance with this Ordinance; the amount of tax payable by the person; the class of business conducted by the person and any other matter which in the opinion of Commissioner is material for determination of correct income.
Vide Finance Act, 2010 the provisions of Section 177 were again substituted and also a new Section 214-C was added, which says:-- "(1) The Board may select persons or classes of persons for audit of Income Tax affairs through computer ballot, which may be random or parametric as the Board may deem fir.
9. From the bare reading of the above noted provision of law as it was at relevant point of time it is to be noted that at original stage the power to select and conduct audit of the tax affairs of any person or class of persons was available with the concerned Commissioner alone, Subsequently, the Board was required to lay down criteria for selection of the cases for audit by the Commissioners and after selection of the case in the light of the criteria issued by the Board the Commissioners were to conduct audit. In addition to selection of the cases for audit in the light of the criteria issued by the Board, the Commissioners were also entitled to select cases in the light of the parameters provided in sub-section (4) of Section 177 of -the Income Tax Ordinance, 2001, However, even after substitution of Section 177 vide Finance Act, 2004 the Commissioners again started acting according to their own intents and without waiting for issuance of any criteria by the FBR and without completing the first phase of selection of cases for audit as per criteria to be laid down by the FBR started selecting the cases for audit. The matter was settled by the superior Courts and all actions taken by the commissioners were declared as not in accordance with law.
Keeping into consideration the above referred facts the legislature again substituted Section 177 and inserted Section 214-C in the Income Tax Ordinance, 2001 vide Finance Act, 2010. After substitution of Section 177 vide Finance Act, 2010 the power to select a case for audit of tax affairs of any person earlier available to the Commissioners were taken away and now only the Board is empowered to select any person or class of persons for audit of tax affairs through computer ballot. The Commissioner is only empowered to conduct audit of the cases selected by Board through computer ballot. It would not be out of place to mention here that after substitution of Section 177 vide Finance Act, 2010 the Commissioners are again misreading the provision by self- assumption of jurisdiction to select and conduct cases of the tax payers for audit. The learned counsel for the department has failed to show that any computer ballot has been conducted by the FBR. The intent of the legislators to select cases for audit through computer ballot on random or parametric basis by the FBR is very clear that there should be no discrimination or misuse of power by any tax official. In this background, how it can be expected that the FBR would hold any computer balloting at the back of the taxpayers.
10. On the other hand if Section 177 is read with sub-section (3) of Section 120, such a notice can be issued only within the Financial Year in which the Income Tax Return is filed as thereafter the notice becomes time barred as the deemed assessment becomes a past Tax Year which cannot be selected for audit. However, any error or illegality in the deemed Order (or the Return) may be corrected under sub-section (5) or sub-section (5A) of Section 122. No notice under sub-section
(3) of Section 120 of the Ordinance was issued to the petitioner within the stipulated time. This practice of selecting for audit past Tax Year has also been deprecated even by the Federal Board of Revenue through its instructions issued on 5-1-2009 to the Chief Commissioners and Commissioners. These instructions are binding on the Commissioner in terms of Section 214 of the Ordinance. Reliance can be placed on the cases of Messrs Central Insurance Co. and others v. The Central Board of Revenue (1993 SCM R 1232), Commissioner of Income Tax v. Messrs Muslim Commercial Bank Limited, (2002 PTD 720); Utman Ghee Industries v. Commissioner of Income Tax (2002 PTD 63) and Chairman FBR and others v. Idrees Traders and others 2012 SCM R 597 = 2012 PTD 693.
11. For the aforesaid reasons, this writ petition is accepted and the impugned notice purportedly issued under Section 177 of the Ordinance is hereby declared as illegal, without lawful authority and of no legal effect. The parties are, however, left to bear their own costs.