'CH. SHAHID IQBAL DHILLON (JUDICIAL MEMBER).---This appeal is directed against the Order-in- Appeal No 76, dated 9-10-2013 passed by the learned CIR (Appeals), Gujranwala whereby he dismissed the appeal against the Order under sections 122(1)/122(5)(i) of the Income Tax Ordinance, 2001, dated 28-6-2013 made by the I.R.O., Audit Unit-02, Zone-I, R.T.O., Sialkot pursuant to the selection of case for audit for the tax year 2007 under section 177(4)(d) of, the Income Tax Ordinance, 2001:
2. The learned A.R. Appearing for the appellant/taxpayer has assailed the Order-in-Appeal on a number of grounds on the legal as well as factual plane challenging the selection of case for audit under section 177(4)(d)(ibid), and the consequent amended assessment.
3. The learned D.R. Has supported the impugned appellate order on the grounds mentioned therein.
4. Having heard the rival parties and perusing the record, we first of all propose to dilate on the legal issue of selection of the case for audit under section 177(4)(d) of the Income Tax Ordinance, 2001, as it goes to the very root of the case.
5. The learned A.R. Arguing on the issue of selection of the case for audit contended as under:--
(i) the learned CIR (A) has grossly erred in law in holding that the 'Commissioner Inland. Revenue was fully justified to select the case for audit in terms of Section 177 of the Income Tax Ordinance, 2001'.
' The learned CIR (A) has committed contempt of the hon'ble Lahore High Court in not following the decision in a parallel case reported in 2013 PTD 391.
' The learned CIR (A) being a judicial officer was bound to follow the latest view of the Hon'ble Lahore High Court on the issue.
(ii) the impugned selection of the case under section 177(4)(d) of the Income Tax Ordinance, 2001 as well as the consequent amended assessment under section 122(1)(d) r/w 122(5)(i) of the Income Tax Ordinance, 2001 are unwarranted, illegal, and without lawful authority for the following reasons:--
(i) The Commissioner (Audit Division), R.T.O., Sialkot had no authority to make selection of this appellant/taxpayer's case for audit under section 177(4)(d) of the Income Tax Ordinance, 2001, as
(a) the discretion vesting in him under subsection (4) of section 177 was in addition to the discretion vesting in the Federal Board of Revenue, meaning thereby that the C.I.T. (Audit) could not exercise his power of selection of the case for audit until the F.B.R. Had first exercised its power under subsection (1) of section 177 (ibid).
' As the F.B.R. Had not exercised its power under subsection (1) of section 177 (ibid) by laying down a criteria for selection for audit of any case for the Tax Year 2007, the CIT(Audit) had no power to select this Appellant! Tax-payer's case for audit under section 177(4)(d)(ibid);
(b) the selection of this appellant / tax-payer's case under clause (d) of subsection (4) of section 177 (ibid) only envisages that the audit under other clauses, viz. -
(a) The person's history of compliance or non-compliance with the Income Tax Ordinance, 2001;
(b) The amount of tax payable by the person; and
(c) The class of business conducted by the person, ' was not warranted even to the very knowledge and considered opinion of the learned CIT (Audit).
' When the (Audit) had no objection as to
(a) The person's history of compliance or non-compliance with the Income Tax. Ordinance, 2001;
(b) The amount of tax payable by the person;
(c) The class of business conducted by the person, ' how can and for what purpose he selected this Tax-payer's case under clause (d) of subsection
(4) of Section 177 (ibid).
(c) power under section 177(4)(d) (ibid) is invokable only when the learned CIT(Audit) is of the considered opinion that the income declared by this Appellant/Tax-payer is incorrect, and audit into its tax affairs is a must for determination of correct income;
(d) there is no finding in the impugned Order under section 177(4)(d) (ibid) that the income declared at Rs. 227,613 is incorrect because of such and such facts on record;
(e) clause (d) of subsection (4) of Section 177(ibid) envisages selection for audit only on specific and reasonable grounds. It does not permit fishing enquiries on suspicions. It is neither a wild goose chase, nor a leap into the dark on a pseudo-hope that there would be a silver lining;
(f) selection of a case for audit under any one clause of subsection (4) of Section 177 (ibid) is not permissible.
' Word "and" occurring after clause (c) and before the last clause (d) clearly suggests that all the factors enumerated in clauses (a) to (d) must co-exist for a valid selection of a case under subsection (4) of Section 177 (ibid); and
(g) the selection of this Appellant/Tax-payer's case is offending the fundamental right guaranteed by Article 25 of the Constitution of the Islamic Republic of Pakistan, 1973.
' Other cases of the like nature neither in the same R.T.O., nor in other R.T.Os. Were selected for audit.
(ii) the F.B.R. Envisaged no audit for the Tax Year 2007, which is evident from the F.B.R.'s Letter C.
No.1(7)-S(TA)/2009-PT-III/ 124693-R, dated 27-8-2011. Relevant excerpt out of Para 2 of this Letter is reproduced hereunder:- "2.. Though audit was one of the pre-requisites of the USAS but it remained suspended for almost five years with a view to allowing taxpayers to adjust to the new system.".
6. The learned D.R. Relying on the learned CIR(A)'s impugned order has contended that selection of the cases for audit under section 177 by the Commissioner was challenged in many cases before Hon'ble Lahore High Court and said petitions were dismissed vide orders passed by more than one Single Bench as well as Division Benches of Hon'ble Lahore High Court. Similarly, Hon'ble Sindh High Court also rejected such petitions. Similar petitions were also dismissed by erstwhile Islamabad High Court and the Hon'ble Supreme Court of Pakistan declined to allow leave to appeal. It would therefore be proper to follow the judgments of the Division Bench of the Hon'ble Lahore High Court and guiding principles laid down by Hon'ble Supreme Court of Pakistan on the subject matter than to follow the Single Bench judgment of the Hon'ble Lahore High Court relied upon by the AR of the appellant. Therefore, by following the ratio settled in the various, judgments of superior courts the appellant's grounds with regard to unlawful selection of the case for audit .Being devoid of merit are liable to be rejected.
7. We have given anxious consideration to the rival arguments on the issue of selection of the case for audit under section 177(4)(d) of the Income Tax Ordinance 2001, and we do not find ourselves in agreement with the Department.
8. Section 177 of the Income Tax Ordinance, 2001, as it applied to the tax year 2007 is reproduced as under:-- "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 lay down by the Board under subsection (1)."
(3) the. Board shall keep the criteria confidential.
(4) in addition to the selection referred to in subsection (2), the Commissioner may also select a person for an audit of the persons income tax affairs having regard to -
(a) the person's history of compliance or non-compliance with this Ordinance;
(b) the 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.
(5) After selection of a person for audit under subsection (2), or (4), the Commissioner shall conduct an audit of the income tax affairs (including examination of accounts and records, enquiry into expenditure, assets and liabilities).
(6) After completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues raised in the audit, amend the assessment 'under subsection (1) or subsection (4) of section 122, as the case may be. (7) The fact that a person has been audited in a year shall not preclude the person from being audited again in the next and following years where there are reasonable grounds for such audits.
(8) The Board may appoint a firm of Chartered Accountants as defined under the Chartered Accountants Ordinance, 1961 (X of 1961), to conduct an audit of the income tax affairs of any person and the scope of such audit shall be as determined by the Board on a case to case basis.
(9) Any person employed by a firm referred to in subsection (8) may be authorized by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the purposes of conducting an audit under that subsection."
9. Perusal of the above-reproduced Section 177 of the Income Tax Ordinance, 2001 makes it abundantly clear that the laying down of criteria for selection of any person for his income tax affairs in terms of subsection (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's income tax affairs having regard to the factors enumerated A in clauses (a), (b) and (c) of subsection (4) of section 177. It would be seen that subsection (4) will come into play when the Commissioner in the course of proceeding with the audit of a person under subsection (2) of section 177 discovers that in addition to the selection of person in subsection (2) the Commissioner now requires to select another person for audit of income tax affairs. This is exactly what is envisaged in subsection (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 subsection (4) of section 177 is secondary in character in relation to subsections (1) and (2). It therefore follows that if subsection (4) is not capable of being isolated from subsections (1) and (2), clause (d) of subsection (4) cannot also be detached from its preceding clauses or subsections.
10. Clause (d) of subsection (4) of Section 177(ibid) cannot be applied in isolation of the preceding clauses (a), (b) and (c) of subsection (4) (ibid), as the word "and" occurring after clause (c) is intended to conjunct all the four clauses for making a valid selection under section 177(4)(ibid).
11. The learned A.R. Has rightly contended that when the clauses (a) to (c) reproduced hereunder, viz:--
(a) The person's history of compliance or non-compliance with the Income Tax Ordinance, 2001 (b)The amount of tax payable by the person; and
(c) The class of business conducted by the person, are not invokable in this case to the very knowledge and considered opinion of the Commissioner, how and for what purposes he can invoke clause (d).
12. It is our considered 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 other. Clause (d) of subsection (4) of section 177 cannot be isolated from its preceding clauses or subsections 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.
13. As regards the learned D.R.'s contentions, they have no force at all. He has not been able to cite any Case-law in support of his contentions except making bald statements reproduced in Para 6 ante.
14. It will not be out of place to mention that clause (d) of subsection (4) of Section 177 of the Income Tax Ordinance, 2001 was not applied to the tax year 2007 by other R.T.Os. In Pakistan, except the R.T.O., Sialkot, as it was not the intention of the F.B.R., which is borne out of the Board's letter C.
No. 1(7)- S(TA)/2009-PT-VIII/124693-R, dated 27-8-2011. Relevant excerpt out of Para 2 of this letter is reproduced hereunder:-- "2.. Though audit was one of the pre-requisites of the USAS but it remained suspended for almost five years with a view to allowing taxpayers to adjust to the new system.".
' As the Income Tax Ordinance, 2001 was applied w.e.f. The tax year 2003, the first five years would certainly include the Tax Year, 2007.
15. The learned A.R. Has also drawn our attention to the fact that the same Commissioner (Appeals) set at naught the selection for audit for the tax year, 2007 in the following cases selected under section 177(4)(d)(ibid):--
(i) Shehryar Enterprises;
(ii) Idrees Traders; and
(iii) Zohaib Rice Mills, ' but in this case he has given the diametrically opposed decision, which offends Article 25 of the Constitution of the Islamic Republic of Pakistan,. 1973 which gurantees equal treatment to all the citizens of Pakistan standing on the same pedestal.
' We do subscribe this view of the learned A.R. And do not find any rationale behind giving discriminatory treatment to this Appellant/ Taxpayer, especially when the Hon'ble Lahore High Court, Lahore has also knocked down the selection for audit under section 177(4)(d)(ibid) for the Tax Year, 2007 in the case reported in 2013 PTD 391, facts and circumstances whereof are identical to this case, and the Department has filed no appeal there against, which makes it a binding precedent.
16. As a sequel to the above, we hold beyond any scintilla of doubt that the impugned selection for audit of this appellant taxpayer's case for audit under section 177(4)(d) of the Income Tax Ordinance, 2001 was illegal and without lawful authority, hence, the same is set at naught, which renders the consequent amended assessment under section 122(1) r/w 122(5)(i)(ibid) to be illegal, hence, the same is cancelled.
17. As this tax-payer's appeal has succeeded on the legal score, though there is no need to dilate on the other grounds, yet we propose to render our judgment on the other vital grounds also in order to set at rest the matter in wholesome.
18. The learned CIR(A) has decided the issue of limitation of amended assessment under section 122(1) of the Income Tax Ordinance, 2001 relying upon the amended provisions of subsection (2) of Section 122(ibid), which were substituted by the Finance Act, 2009.
19. According to the learned A.R., the law applicable to a tax year would be the one, which was in vogue on the first day of the commencement of the tax year, as a Finance Act / Ordinance contains the financial proposals and amendments for the' ensuing tax year i.e. From the 1st day of July next following, which is abundantly clear from the preamble of each Finance Act. Thus, an amendment brought about by the Finance Act, 2009 would not be applicable to the cases for the tax year 2007.
20. Contrary to the learned A.R., the learned D.R. Contended that as the law of limitation is a procedural law, any amendment therein would operate retrospectively.
21. Retorting to this argument of the learned D.R., the learned A.R. Contended that Section 122 of the Income Tax Ordinance, 2001 gives a power of amendment of assessment to the Commissioner in the circumstances narrated in subsections (5) & (5A) thereof, which is a right of the Department, which may be exercised within the period of limitation laid down in subsection (2) thereof, and subsections (6) to (9) contain the procedure for making the amended assessment. Thus, this section deals with the rights and procedure together. In such a situation, the Hon'ble Supreme Court of Pakistan has held in 2009 PTD 1392 that:-- "Where rights and procedure are dealt with together, the intention of the legislature may well be that old rights are to be determined by the old procedure, and that only the new rights under the substituted section are to be dealt with by the new procedure.". (at pp. 1454 & 1455)
22. Respectfully following the above verdict of the Hon'ble apex Court, we do hold that as the law contained in section 122 of the Income Tax Ordinance, 2001 deals with the rights and procedure together, any amendment therein would be prospective. Thus, the following subsection (2) of section 122 of the Income Tax Ordinance, 2001 substituted through the Finance Act, 2009: "(2) No order under the subsection (1) shall be amended by the Commissioner after the expiry of five years from the end of the financial year in which the Commissioner has issued or treated to have issued the assessm ent order to the taxpayer.", ' would not apply to the tax year 2007. It would apply to the Tax Years commencing on or after the 1st July, 2009.
23. Applying the above yardstick, the impugned amended assessment in respect of tax year 2007 finalized on 28-6-2013 had to be made, if warranted, according to the old provisions of subsection
(2) of Section 177 of the Income Tax Ordinance, 2001 within five years after the Commissioner had issued the assessm ent order, which in this case was issued on "30-9-2007", and the limitation of "five years" ended on "30-9-2012". Hence, the impugned amended assessment is adjudged to be time-barred also.
24. The appeal filed by the taxpayer stands disposed of as above.