SHAMS MEHMOOD MIRZA, J. The notice issued under section 177 of the Income Tax Ordinance, 2001 (the Ordinance) for selecting the case of the petitioners for audit has been called into question in this writ petition and in the connected petitions mentioned in "Schedule A" attached with this judgment.
2. It is the case of the petitioners that the Commissioner Inland Revenue (the Commissioner) before selecting the case for audit is required to call for record or documents from the taxpayer and to communicate to him the reasons for doing so. To support their case, the petitioners place reliance on the proviso to section 177. The petitioners also plead that the discretionary power vesting in the Commissioner is unbridled and is required to be structured.
3. The respondents plead that the text of section 177 does not support the case of the petitioners and that the notice simpliciter cannot be impugned in the constitutional jurisdiction of this Court.
4. Section 177 in so far as it is relevant reads as under:
177. Audit.-- (1) The Commissioner may call for any record or documents including books of accounts maintained under this Ordinance or any there law for the time being in force for conducting audit of the income tax affairs of the person and where such record or documents have been kept on electronic data, the person shall allow access to the Commissioner or the officer authorized by the Commissioner for use of machine and software on which such data is kept and the Commissioner or the officer may have access to the required information and data and duly attested hard copies of such information or data for the purpose of investigation and proceedings under this Ordinance in respect of such person or any other person: Provided that:
(a) the Commissioner may, after recording reasons in writing call for record or documents including books of accounts of the taxpayer; and
(b) the reasons shall be communicated to the taxpayer while calling record or documents including books of accounts of the taxpayer:
5. In writ petition No.14710 of 2021 titled Jehangir Ahmad v. The Federation of Pakistan etc, a challenge was made to the notice under section 177 on the ground that the said provision contemplates a two-stage process where the taxpayer is required to produce the record at the asking of the Commissioner who on examination thereof shall select the case for audit. This argument was put forward on the analogy of section 25 of the Sales Tax Act, 1990 and the judgment reported as Indus Motor Company Limited v. Federation of Pakistan etc 2020 PTD 297.
This proposition was not accepted by this Court and it was held that the substantive provision of section 177 grants authority to the Commissioner for audit and that section 25 of the Sales Tax Act is a different provision the procedure whereof cannot be made applicable to section 177. In relation to the proviso, it was stated as under: It is a settled rule of interpretation that a proviso must be construed harmoniously in relation to the matter to which it stands as a proviso. In other words, the operation of the proviso is limited in its operation to the ambit of the section it qualified. Where the section confers powers, "it would be contrary to the ordinary operation of a proviso to give it an effect which would cut down those powers beyond what compliance with the proviso renders necessary." (See Maxwell on Interpretation of Statutes).
As the case was not argued fully on the interpretation of the proviso, this Court left open the question of the true import of the proviso for a future case.
6. The pivotal question requiring decision from this Court is whether the power to select for audit by the Commissioner is curtailed by the limitations imposed by the proviso to section 177.
7. There does not appear to be any doubt on a plain reading of the substantive provision of section 177 (highlighted above) that the authority to select for audit precedes the summoning of the record from the taxpayer. In other words, there is causal relationship between selection of audit by the Commissioner and summoning of the record from the taxpayer. There can be no other possible interpretation of the provision on its plain and simple language. The petitioners contend that the proviso to sub-section (1) qualifies the power of the Commissioner to select the case of a taxpayer for audit by postponing and deferring it after the supply of the requisitioned record for which reasons are to be recorded and communicated to the taxpayer. This construction cannot be accepted without doing violence to the explicit command of the main provision of section 177 under which the selection for audit by the Commissioner is the first stage and summoning of the record follows thereafter.
8. Section 177 is to be interpreted as it exists on the statute for the purposes of adjudicating the issue involved in this case. It would nevertheless be appropriate to look into the legislative background and the amendments introduced in section 177 from time to time. The selection for audit by the Commissioner under the original provision was regulated and guided by the criteria laid down in the main provision. The provision was amended through Finance Act, 2004 with the result that selection by the Commissioner was made dependent on the criteria to be laid down by the Federal Board of Revenue (the Board). In addition thereto, the Commissioner was empowered to independently select a person or classes of persons having regard to the criteria provided in sub-section (4). The said provision reads as under:
(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 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. (Emphasis supplied)
It may be noted that the selection for audit even under the original provision was antecedent to the examination of record by the Commissioner.
9. Section 177 was substituted firstly by Finance Act, 2009 and then by Finance Act, 2010 and, amongst others, the proviso was added to sub-section (1) and simultaneously the power of the Board to lay down the criteria and the criteria guiding the Commissioner to select the cases of taxpayers for audit was omitted. This is the provision that currently exists on the Ordinance by the terms of which the Commissioner is not made bound by any criteria for selecting the case of a taxpayer for audit. Through Finance Act, 2010, the power of the Commissioner to select cases of classes of persons for audit was also done away with and it was conferred on the Board under the newly added section 214C.
10. The proviso simply requires the Commissioner to record reasons in writing for summoning the record and to communicate the same to the taxpayer. Arguably, the obligation imposed on the Commissioner by the proviso to record reasons in relation to requisitioning the record may correspond and even overlap with the requirement of disclosure of reasons for selection of audit.
Section 177, however, does not require the Commissioner to adhere to any criteria in selecting a taxpayer for audit. While communicating the reasons for summoning the record, the taxpayer is also informed about its selection for audit.
11. Mr. Mansoor Awan, Advocate contended that the proviso shall apply to the entire main provision contained in section 177(1) and, therefore, unless the record is summoned along with communication of reasons the Commissioner cannot exercise the power for selection for audit. The proposition put forward by the learned counsel, if accepted, would negate what the main provision commands and that cannot be the intention of the legislature. The general principle of construction is that the function of a proviso is to except or qualify something enacted in the substantive clause, which but for the proviso would be within that clause. The duty cast on the Commissioner to give reasons for summoning the record and communicating the same to the taxpayer being additional requirements could very well be part of the substantive provision as they are not limiting the power of the Commissioner. The draftsman has, however, inexplicably put them in the proviso. But it is generally recognized that in exceptional cases a proviso may be a substantive provision itself which adds to and not merely qualifies that which goes before. The Indian Supreme Court in the case of Commissioner of Commercial Taxes, Board of Revenue Madras and another v. Ramkishan Shrikishan Jhaver AIR 1968 SC 59A, cited with approval the law laid down in Commissioner of Income Tax v. Nandlal Bhandari and sons ITR 803 (NP) as follows: "...........at times the legislature embodies a substantive provision in a proviso. The question whether a proviso is by way of an exception or a condition to the substantive provision, or whether it is in itself a substantive provision, must be determined on the substance of the proviso and not its form."
This Court is satisfied that the proviso is in fact an independent provision which imposes additional obligations on the Commissioner.
12. In contrast to section 177, the procedure under section 25 of the Sales Tax Act, 1990 and sections 45 and 46 of the Federal Excise Act, 2005 stipulates that the Commissioner shall in the first place summon the record/documents from the taxpayer and shall thereafter select it for audit. A learned Division bench of the Sindh High Court in Indus Motor Company's case held as under: First a notice for access to records under sub-section (1) has to be issued, and once the record is obtained, only then he can have resort to sub-section (2) of s.25 of the 1990 Act, for selecting and ordering audit of the a tax payer, after going through the record so obtained, and that can only be done by an independent application of mind and after recording of reasons for doing so.
The petitioners invite this Court to interpret section 177 in a manner the learned Sindh High Court has interpreted section 25 of the Sales Tax Act and sections 45 and 46 of the Excise Act, 2005. There is, however, no similarity between the two provisions the texts whereof are materially different to section 177. Under section 25, audit follows once the record is summoned by the Commissioner whereas section 177 stipulates that selection for audit is the trigger for summoning the record.
13. Some of the learned counsels also placed reliance on sub-section (2) of section 177 to contend that it is only after obtaining the record that audit could proceed. This argument is without any force. Whereas sub-section (1) deals with selection for audit and its proviso directs the Commissioner to summon the record from the taxpayer, sub-section (2) deals with conduct of the audit and authorizes the Commissioner to proceed with the audit after the record has been obtained from the taxpayer.
14. It was also argued that unbridled discretionary powers cannot be given to the Commissioner to call for the record from the taxpayer and that the discretion vesting in him must be structured through rules. This argument cannot be accepted on principle. Absolute discretion and Rules are at the opposite ends of spectrum in administrative decision-making process. With the growth of administrative agencies, the Courts and the academics alike recognize the necessity and even desirability of administrative discretion as it brings flexibility in the process in contrast to application of rigid rules. This is, however, not the time or place for an in-depth analysis of the doctrines underpinning the rationale for confining and structuring of discretion. Suffice it to state that it is generally recognized that the substance of the decision to be made and its administrative context shall be a significant determinant in assessment by the court for structuring of discretion.
The selection for audit under section 177 is not an automated process for each case depending upon the varying circumstances would bring its own peculiarities. It is well-nigh impossible through rules to list out criteria for selection of cases for audit by the Commissioner. The existence of discretion in the process prescribed by section 177 suggests absence of a rule imposing a specific result in each case. If the power of the Commissioner is confined by rules, the flexibility that inheres in the judgment of the Commissioner shall be lost. In fact, failure of the Commissioner to exercise such discretion and independent judgment may constitute a jurisdictional error. It is for this reason that where class of persons were to be subjected to audit, the legislature provided in section 214C that this shall be done through computer balloting which may be random or parametric. Section 214C guides the Board's power to select cases for audit through parameters in respect of which the Board has issued from time to time the audit policies. The legislature has provided an explanation in section 214C to the effect that powers under the said provision and section 177 are distinct and independent. The legislature has thus provided for guided exercise of power for selection for audit where it thought it would be necessary and simultaneously preserved flexibility in the exercise of power by the Commissioner by eliminating any criteria.
15. The power to select for audit granted by section 177, however, ought to be considered in terms of jurisdiction and authority to act rather than discretion which is a sub-set of jurisdiction. Jurisdiction by its nature is a general concept of power to do a particular thing whether it involves discretion or not. The legal concept of discretion implies the power to make a choice between alternative courses of action. If only one course can lawfully be adopted, the decision taken is not the exercise of a discretion, but the performance of a duty (see De Smith, Woolf & Jowell, Principles of Judicial Review). The concept of discretion refers to decisions where the law does not dictate a specific outcome or where the tribunal is given a choice of options within a statutorily imposed set of boundaries [see Baker v. Canada (Minister of Citizenship and Immigration) [1999] S.C.J. No. 39].
Lord Diplock in the case of Secretary of State for Education and Science v. Tameside Metropolitan Borough Council [1977] A.C. 1014 said: The very concept of administrative discretion involves a right to choose between more than one possible course of action upon which there is room for reasonable people to hold differing opinions as to which is to be preferred.
16. There are very few judgments in our jurisdiction in which the concept of "structuring of discretion" has been expounded. There is, however, hardly any discussion in the said judgments on the constitutional principle which can be brought in aid by the Courts to issue a writ of mandamus for framing of rules, standards or policy where discretion in administrative decision-making is conferred by the statute to confine and structure it. It is an established constitutional principle that where discretion has been granted by legislature to an authority to be exercised in a variety of circumstances that discretion is intended to be exercised by the repository without placing any fetters on such jurisdiction.
17. The scope and extent of the legislative authority of the Parliament for conferring on the administrative authority the function of implementation of the policy of the statute is the subject matter of number of judgments from our jurisdiction. The Hon'ble Supreme Court in the case of Province of East Pakistan v. Siraj ul Haq Patwari PLD 1996 SC 854 stated as follows: ...........If the subject-matter of legislation is within the competence of the Legislature than it can certainly legislate in any one of the generally accepted forms of legislation either directly or referentially, absolutely or conditionally within its own sphere of legislation and it has always been recognized under all systems of legislation that the Legislature may well leave it to some external authority to implement its policy or to determine as state of things on which the law intends to make its action depend or to fix in its direction the time at which the law is to come into operation, the area over which it is to extend and the manner in which it is to be carried out into effect. This principle was not only laid down by the Privy Council in the case of The Queen v. Burah (1) [(1878)3 App.889] and followed by this Court in the case of the District Magistrate, Lahore v. Raza Kazim
(2) [PLD 1961 SC 178], but even the famous American jurist Thomas M. Cooley in his treatise on Constitutional Limitations recognize that "it is not always essential that a legislative act should be a completed statute which must in any event take effect as law, at the time it leaves the hands of the legislative department. A statute may be constructional, and its taking effect may be made to depend upon some subsequent event." (Vide Volume 1, page 227).
Again, at page 228 the same learned author states: "The maxim that power conferred upon the Legislature to make laws cannot be delegated to any other authority does not preclude the Legislature from delegating any power not legislative which it may itself rightfully exercise. It may confer an authority in relation to the execution of a law which may involve discretion, but such authority must be exercised under and in pursuance of the law. The Legislature must declare the policy of the law and fix the legal principles which are to control in given cases; but an administrative officer or body may be invested with the power to ascertain the facts and conditions to which the policy and principles apply. If this could not be done there would be infinite confusion in the laws, and in an effort to detail and to particularize, they would miss sufficiency both in the provisions and execution."
Similarly, in judgment reported as Mian Rafi-ud-Din and Six others v. Chief Settlement and Rehabilitation Commissioner and two others PLD 1971 SC 252. The Hon'ble Supreme Court held as under: ........It is contended that the Legislature has, by giving such uncontrolled powers to the executive of amending the Schedule, which formed part of the Act, really abrogated its powers of legislation and effaced itself. I am unable to accept this contention, for; having regard to the nature of the legislation itself it was impossible to expect the Legislature to provide for all possible eventualities which were likely to arise due to the complexities of the problems from day-to-day. This was a fit subject, therefore, in respect of which the power of making subsidiary provisions could be validly delegated to the executive or those responsible for administering the law.
18. The grant of discretion with the authority does not imply that it can make any decision without regard to the statute and the scope of power vested in it. Lord Upjohn in the celebrated case of Padfield v. Minister of Agriculture, Fisheries and Food [1968] 1 All E.R. 694 held that: [T]he use of that adjective [unfettered], even in an Act of Parliament, can do nothing to unfetter the control which the judiciary have over the executive, namely, that in exercising their powers the latter must act lawfully and that is a matter to be determined by looking at the Act and its scope and object in conferring a discretion upon the Minister rather than by the use of adjectives.
19. The best exposition of this principle in our jurisdiction can be found in the case of Muhammad Amin Muhammad Bashir Limited v. Government of Pakistan through Secretary Ministry of Finance and others 2015 SCMR 630 in which the Hon'ble Supreme Court held that: The exercise of any discretionary power must be rational and have a nexus with the objective of the underlying legislation. Arbitrariness is the antithesis of the rule of law. The legislature, when it confers a wide ranging power, must be deemed to have assumed that the power will be, firstly, exercised in good faith, secondly, for the advancement of the objects of the legislation, and thirdly in a reasonable manner. Section 24A of the General Clauses Act, 1897, reiterates the principle that statutory power is to be exercised "reasonably, fairly, justly and for the advancement of the purposes of the enactment" and further clarifies that an executive authority must give reasons for its decision. Any action by an executive authority which is violative of these principles is liable to be struck down. No other view is permissible."
The underlying principle for this standard of review is that the administrative action must be confined within the power conferred by the statute and that the discretion is required to be exercised in terms of the object of the statute for implementing the mandate allocated to the authority.
20. It may be emphasized that discretionary decisions by the administrative authorities as a matter of principle are not reviewed on merits for the reason that the reviewing court shall not substitute its opinion for that of the authority thereby interfering with the power allocated to that authority by the legislature. The role of the Court in reviewing administrative decisions is not to reassess the case or to review the merits of the decision or to decide whether the same was right or wrong. In fact, the questions concerning the Court must be whether the authority in the decision-making process acted in accordance with the object of the statute and whether it took into account only the relevant considerations. The courts are even otherwise show utmost restraint while reviewing exercise of discretion by the administrative authorities in deference to their specialized knowledge, expertise and experience. The courts, except in cases of unreasonable decision (irrationality test) or if excess of jurisdiction is involved, do not reverse the administrative determination. In Minister for Aboriginal Affairs v Peko-Wallsend Ltd (1986) 162 CLR 24, Justice Mason expressed pertinent observations about the court's limited role in reviewing the exercise of an administrative discretion.
It was held that: The limited role of a court reviewing the exercise of an administrative discretion must constantly be borne in mind. It is not the function of the court to substitute its own decision for that of the administrator by exercising a discretion which the legislature has vested in the administrator. Its role is to set limits on the exercise of that discretion, and a decision made within those boundaries cannot be impugned (Wednesbury Corporation, at p.228). It follows that, in the absence of any statutory indication of the weight to be given to various considerations, it is generally for the decision-maker and not the court to determine the appropriate weight to be given to the matters which are required to be taken into account in exercising the statutory power I say "generally" because both principle and authority indicate that in some circumstances a court may set aside an administrative decision which has failed to give adequate weight to a relevant factor of great importance, or has given excessive weight to a relevant factor of no great importance. The preferred ground on which this is done, however, is not the failure to take into account relevant considerations or the taking into account of irrelevant considerations, but that the decision is "manifestly unreasonable". This ground of review was considered by Lord Greene M.R. in Wednesbury Corporation, in which his Lordship said that it would only be made out if it were shown that the decision was so unreasonable that no reasonable person could have come to it. ... The test has been embraced in both Australia and England. (Emphasis Supplied)
In the same vein, in the case of Attorney-General (NSW) v. Quin (1990) 170 CLR 1 Justice Brennan expressed extremely apposite observations, which are reproduced as under: The duty and jurisdiction of the court to review administrative action do not go beyond the declaration and enforcing of the law which determines the limits and governs the exercise of the repository's power. If, in so doing, the court avoids administrative injustice or error, so be it; but the court has no jurisdiction simply to cure administrative injustice or error. The merits of administrative action, to the extent that they can be distinguished from legality, are for the repository of the relevant power and, subject to political control, for the repository alone. The consequence is that the scope of judicial review must be defined not in terms of the protection of individual interests but in terms of the extent of power and the legality of its exercise. (Emphasis supplied)
21. In Intercity Transportation v. United States [737 F.2d 103 (D.C. Cir. 1984)] 140, the D.C. Circuit cited with approval the following criteria in relation to cases in which unreviewability might be inferred. a. where there is little need to safeguard petitioner's interests; b. review would impair the effectiveness of agency administration; and c. the disputed issue is not appropriately drawn for judicial review.
22. As noted above, section 177 as it was originally enacted placed fetters on the exercise of power by the Commissioner in audit selection with reference to certain conditions laid down therein. The legislature, however, substituted the said provision through Finance Act, 2019 and Finance Act, 2010 wherein the standards were omitted and instead the Commissioner was required to give reasons in the proviso for summoning the record/documents from the taxpayer. A degree of freedom and flexibility was thus allowed to the Commissioner to select cases for audit without being burdened with pre-existing conditions and standards. The proviso to section 177 (1) not only requires notice to the taxpayer but also communication of reasons for summoning of the record/documents. The process envisaged by section 177 also provides a further right of hearing to the taxpayer at the culmination of audit when the Commissioner is directed to seek his explanation on all issues raised in the audit. The Commissioner may thereafter amend the assessment order in terms of section 122 against which multiple rights of appeal/reference are granted to the taxpayer. Thus, in lieu of direct substantive guidance, the legislature structured the process by enhancing appellate oversight. If the obligations to give reasons for summoning the record through the proviso are deemed corresponding to those for selection of audit, the power of the Commissioner shall be taken to be circumscribed. In cases of discretionary decision-making, it would normally suffice if the requirements of notice, hearing and determination through fair procedures is guaranteed by the statute. All the three conditions in case of selection under section 177 are met with and satisfied as will be demonstrated shortly with reference to certain case law. The plea of the petitioners that the discretion vesting in the Commissioner under section 177 is unbridled is, therefore, not correct and is accordingly repelled.
23. We may now turn to the case law in which it has already been decided that the power of the Commissioner to select for audit is conditioned by adequate controls. This Court in the case of Kohinoor Sugar Mills v. Federation of Pakistan 2018 PTD 82 referred to the safeguards and protection available to a taxpayer during and after the conclusion of audit when the Commissioner before proceeding to amend the assessment under section 122 is required to obtain the taxpayers explanation on all the issues raised in the audit. In paragraph 35 of the judgment, the learned Judge furthermore held that provisions relating to audit are not charging provisions and that ......These provide a mechanism to test the validity of a return filed by a taxpayer who has been trusted by the legislature to submit his return on self-assessment basis. In case the return is found to be a correct reflection of the Income Tax affairs of the assessee, honestly, truthfully and accurately disclosed duly supported by books and records, he would have nothing to fear and no further proceedings would be required to be undertaken. However, in the event that concealment, dishonesty and misstatements are found, then the taxpayer has betrayed the trust reposed in him by the legislature in which event the department must have the requisite powers (subject to the law and safeguards available within the law) to conduct an audit to uncover illegalities and concealment that the taxpayer may have committed and recover what is lawfully due from him under the law.
Furthermore, the learned Division bench of this Court in the case of The Federal Board of Revenue etc. v. M/s Chenone Stores Limited etc 2018 PTD 208 explained the purpose of the audit as follows: Purpose of audit has been discussed in number of cases by the Superior Courts and is held that after extending the facility of self assessment, to audit a taxpayer's declaration in the return filed under it, is the right of Tax Administrator. It is discernable from the law laid down by August Supreme Court in Media Network and Faitma Sharif Cases that selection and conduct of audit, being administrative in nature, is not detrimental to the interest of a taxpayer. State, through FBR, has a right to audit, against taxpayer's corresponding duty to make correct declarations and comply with the statutory commands under three Federal Taxing Statutes. Findings in Chenone Stores' judgment that 'use of audit provisions for investigation, would give the department a license to carry out a roving inquiry into the affairs of any taxpayer and to fish for defaults' is against the basic concept of audit. The concept of audit, as being internationally accepted, has traveled beyond mere verification of correct reporting by taxpayer and raising revenue. Besides creating deterrence by punishing the defaulting taxpayer, an effective audit program pinpoints noncompliant trends; defects in system, ambiguities in practice and the law. On the basis of gathered information and intelligence from an effective audit, and its publication, future Tax Administration can be reshaped; necessary steps can be taken to suggest curative legislation and clarifications of ambiguous practices.....(Emphasis supplied)
24. There are certain observations in the Kohinoor's case, which require clarification. It was held in the said judgment that: The powers of the Commissioner under section 177 are and have been subject to restrictions imposed by statute as well as judgments of superior courts.
The law settled by the Hon'ble Supreme Court of Pakistan in CIT v. Fatima Sharif Textile, Kasur (1994 Tax 317) and C.P. Nos. 1664-1665/2009 (Pakistan Mobile Communication Limited case) still holds the field. It is therefore held that the Commissioner is not only required to disclose reasons to the taxpayer in writing for calling for his record, documents, books etc, but also grant him an opportunity to defend himself by affording him hearing. It is only after the objections have been decided through a reasoned order that he may, if necessary, proceed with the audit. The learned counsel for the Respondents on instructions have categorically and emphatically stated that indeed this procedure would be followed by the Commissioner in letter and spirit, which is in line with the law laid down by the Hon'ble Supreme Court of Pakistan as noted above.
(Emphasis supplied)
With utmost respect, the observations made by this Court in Kohinoor's case for granting an opportunity of hearing to the taxpayer after requisitioning of the record and requiring the Commissioner to pass a reasoned order on the objections, if any, raised by him have no basis in law. The judgments relied upon in Kohinoor's case (appearing in the passage quoted above) were based on section 177 as it existed prior to its amendment through Finance Act, 2009 and Finance Act, 2010. The unamended provision restricted the selection of audit on the criteria mentioned therein. Both these judgments disposed of the cases on the conceding statements made by the learned counsels for the Department. In the case of CIT v. Fatima Sharif Textile, Kasur, the case was disposed of by the Hon'ble Supreme Court as the Central Board of Revenue agreed to issue notice to the taxpayer disclosing reasons/criteria of its selection for its audit. The case of Pakistan Mobile Communication Limited was disposed of through a short order which reads as follows: Learned counsel for the petitioner agreed for the disposal of the listed petitions if the observations are made that the petitioner shall file reply to the show-cause notice before the Commissioner, Income Tax, raising all legal objections available to him and the legal objections shall be disposed of preferably before proceeding on merit and thereafter if need be, merits of the case shall also be considered.
It is apparent that the Hon'ble Supreme Court was dealing with cases relating to section 177 as it existed prior to the amendments made through Finance Act, 2009 and Finance Act, 2010. It is also evident that the Hon'ble Supreme Court did not lay down any authoritative, binding law to the effect that before proceeding with the audit the Commissioner has to grant hearing to the taxpayer by inviting objections and passing a reasoned order thereon. The judgment in Kohinoor's case itself makes it clear that the direction was given to the Commissioner to grant hearing to the taxpayers in view of the conceding statement of the learned counsel for the Department.
25. The Hon'ble Supreme Court in its latest judgment rendered in the case of Commissioner of Inland Revenue Sialkot and others v. Messrs Allah Din Steel and Rolling Mills and others 2018 SCMR 1328 has once again reiterated the legal position that mere selection for audit does not cause an actionable injury to the taxpayer. It was held as under: 10........We have repeatedly held that mere selection for audit does not cause an actionable injury to the Taxpayer. The reason and objective for conducting an audit under a scheme of self- assessm ent, which is the regime provided by the Ordinance, is to check the accuracy, truthfulness and veracity of the returns filed by the Taxpayers. These are required to be supported by the requisite documentation and records. When a Taxpayer is selected for audit, he is called upon to explain his case where explanation is required and furnish the documents which support such explanation. In case, he satisfies the authorities that the tax returns submitted by him are truthful, reliable and supported by the necessary documentation, it may not culminate in further proceedings or in an amendment in the returns and enhanced tax liability may not be the outcome. This is so because mere selection for audit by itself is not a complete process. This is the beginning of a process which may or may not culminate in revision of assessment, enhanced tax liability or other adverse legal consequences. It may also be noted that once a Taxpayer is selected for audit and till such audit is completed the Taxpayer is provided ample and multiple opportunities at every step to defend his position, support his returns and offer explanations for the information provided and entries made in the tax returns. Further, even if a discrepancy is discovered he is provided yet another opportunity to explain his position before his assessment is revised. It must therefore be emphasized that the process of audit is in essence an exercise of reverification of the truthfulness, accuracy and veracity of the returns filed by a Taxpayer in a regime of self-assessment where the State reposes confidence in the Taxpayer, gives him a freehand and provides him the option to undertake his own assessment of the quantum of tax that he is liable to pay. His return automatically takes the form of a final assessm ent order unless it is reopened and re-examined in the circumstances provided in the law itself.......
16. A perusal of the statutory landscape makes it clear that the provisions of sections 177 and 214 of the Ordinance; section 25 of the Act, 1990 and section 46 of the Act, 2005 provide a mechanism and roadmap which is required to be followed by the Taxation Officer/Auditor. In terms of section 177 of the Ordinance, the Commissioner can call for the record or documents for conducting the audit of the tax affairs of a person, provided he furnishes reasons to do so. Such reasons must be communicated to the Taxpayer. He can also seek explanations from the Taxpayer on issues raised during the audit in terms of section 177 of the Ordinance. It is only if he is convinced that the explanation furnished by the Taxpayer is not satisfactory, he may proceed to amend the assessment under section 122 of the Ordinance, after giving the Taxpayer an opportunity to defend him. We are therefore of the view that the statutory framework together with the overarching umbrella of constitutional guarantees furnish adequate and sufficient safeguards to the Taxpayer where there is a possibility of overstepping by the Tax authorities.
It may be pointed out that the Hon'ble Supreme Court in this case granted the right of explanation to the taxpayer by way of submission of documentary evidence but did not reserve any right of hearing to the taxpayer at the pre-audit stage much less the imposition of duty on the Commissioner to give reasons as obligated by the judgment in Kohinoor's case.
26. That being the position of law on audit, there appears to be hardly any justification or basis for granting hearing to the taxpayer at the stage of requisitioning of the record more so when section 177 does not grant any such right to the taxpayer. Even otherwise, the Commissioner is merely seeking the record/documents from the taxpayer by providing him reasons. These reasons are non-justiciable, which at the pre-audit stage cannot be assailed before a Court of law in view of the law laid down in Kohinoor's case and Messrs Allah Din Steel and Rolling Mills. In conclusion, this Court in Kohinoor's case held that even if reasons were not disclosed in the impugned notices the lapse is not fatal and is curable at the stage of appearance of the taxpayer before the Commissioner. While dismissing the petitions, this Court in Kohinoor's case directed that in case the notices do not disclose the reasons for calling the record the Commissioner shall communicate the same to the taxpayer and to grant opportunity of hearing to him and to decide the objections through a reasoned order.
27. The learned counsels also relied on an observation made in the Chenone's judgment to the effect that the Commissioner's "..... discretion to call for record to conduct audit need to be structured for avoiding its potential misuse." This observation, as is apparent from the paragraph where it appears, was made in respect of repeated selection of audit year after year of a taxpayer.
It was accordingly observed by the learned Division bench that Yet in our opinion, his discretion to call for record to conduct audit need to be structured for avoiding its potential misuse. This discretion should not be used to call a taxpayer consecutively to meet budgetary targets of collecting tax. In subsection (7) of the Section 177, though the legislature has authorized audit of a taxpayer in the next and following tax years but only where there are reasonable grounds for doing so. These reasonable grounds need to be confronted, in addition to the reasons for selection required under the first proviso. Commissioner can call for last six years record for audit, as is deducible from the second proviso, therefore, collective reading would show that the Legislature deprecates, as a rule, selection or calling for record of a taxpayer every year. Calling for record in the next or following year should be in exceptional circumstances on very sound reasons.
Structuring of discretion, liable to be misused, has been ordained by Supreme Court of Pakistan.....
There is no conclusive findings in the said judgment that the power to select under the main provision is required to be restricted by rules, standards and policy.
28. The selection for audit under original section 177 was subject to fulfillment of certain conditions as enumerated in clauses (a) to (d) of sub-section (1). These conditions were omitted from section 177 as substituted through Finance Act, 2010 and instead the requirement of giving reasons for calling of record/documents was imposed on the Commissioner through the proviso to sub- section (1). The Commissioner is now liable to give reasons for summoning of the record and proceedings with the audit. The selection for audit per se does not saddle the taxpayer with any liability and accordingly it was held in Allah Din's case that such a selection does not constitute an actionable injury to the taxpayer entitling him to challenge the same in a Court of law. Audit, it may be emphasized, is a much wider exercise than amendment of the assessment. Be that as it may, if the assessm ent gets amended in the course of audit the taxpayer shall have the remedy to challenge the same by resorting to the remedies of multiple appeals/reference available under the Ordinance.
29. In the present case as well as in all the connected cases, the Commissioner in the impugned notices has given reasons for summoning the record/documents and for selection for audit. The requirements of the proviso to section 177(1) have been met and, therefore, there is no occasion for the petitioners to be aggrieved of the notices issued to them and to challenge the same.
30. In the circumstances, this writ petition as well as connected writ petitions have no merit and are dismissed.