Mr. M.Mehtab Khan, Advocate : for the Complainant.
Mr. S.A.Mateen, DCIT : for the Respondent.
The complainant, a private limited company engaged in the business of import, installation and service of lifts, is aggrieved by selection of its case for audit by the Income Tax Department.
2. Brief facts of the case are that the complainant filed its return of income for the tax year 2004 declaring income of Rs.2,422,610. Vide his letter dated 17.05.2006, the Commissioner of Income Tax (CIT) intimated the complainant that its case has been selected for audit under section 177 of the Income Tax Ordinance, 2001 (hereinafter referred as the Ordinance), for the reasons mentioned in the said letter which is reproduced as under:-
SUB:AUDIT FOR TAX YEAR 2004 – INTIMATION REGARDING.
Dear Tax Payer,
Reference your Income Tax Return for the Tax Year 2004. It is evident from your record that you are deriving income from business of Import, Installation and Services of Lifts. You have declared income at Rs.2,422,610. Tax was paid at Rs.1,034,489. Examination of your case record reveals the following matters:
1). You have declared contract receipts of Rs.33,287,002 out of which Rs.15,291,212 has been shown as advance during the year. Tax has been deducted at 5% on total contract receipts at Rs.1,664,350. As per First Schedule, Part – I, Division – III, the rate of tax on contracts above Rs.30 million is 6%. You have made short payment of tax at Rs.332,870.
2). As compared with last tax year the receipts have decreased by 18.5% whereas there is an increase of 10% in the administrative expenses. The variations do not correlate with each other, when gross receipts are going down which mans overall business activity is going down then how come there is a prominent upward jump in indirect expenses. You have also shown an expense of dividend at Rs.648,784 in the administrative expense for the first time. These expenses and receipts need audit to check admissibility of expenses and authenticity of receipts.
3). As per note 3 of audited accounts trade creditors and accrued liabilities have increased by 27% and 39% respectively, which indicates increased business activity. This requires audit as your receipts and overall business activity is showing a downward trend.
4). Short term investment has increased from Rs.2,324,777 to Rs.3,950,932, an increase of 69%. However, no profit has been shown by you on this investment. Audit is required to examine the source and nature of investment.
5). You have not complied with the ordinance as you have failed to provide complete details of addition to assets amounting to Rs.929,260 as per rule 12 of the Income Tax Rules, 2002. These assets needs to be checked in reference with section 68 and 76 of the Income Tax Ordinance, 2001.
In view of the above, you are selected for Audit of your income tax affairs as provided under section 177(4)(A), 177(4)(b) and 177(4)(d) of the Income Tax Ordinance, 2001.
The Taxation Officer concerned shall soon be in contact with you in this connection. I hope that you will fully cooperate with the Audit Team during the audit proceedings.
Please be assured that the audit proceedings would be closed if nothing adverse is discovered.
COMMISSIONER OF INCOME TAX”
The complainant has felt aggrieved by such selection and hence the present complainant.
3. For the sake of facility, the relevant provision of section 177 of the Ordinance is reproduced as under:
“177 – Audit
The Central Board of Revenue, may lay down criteria for selection of any person for an audit of person’s income tax affairs, by the Commissioner.
The Commissioner shall select a person for audit in accordance with the criteria laid down by the Central Board of Revenue under sub section (1).
The Central Board of Revenue shall keep the criteria confidential.
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 regard to –
the person’s history of compliance or non-compliance with the 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
After selection of a person for audit under sub section (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) of that person.
After completion of the audit under sub section (5) or sub section (8), the Commissioner may, if considered necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit, amend the assessment under sub section (1) or sub section (4) of section 122, as the case may be.
- - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - - - - - - ”
4. The complainant has contended that selection so made by the Commissioner is bad in law and is without jurisdiction as the complainant was neither confronted nor given any opportunity of being heard before such selection and, as such, principle of natural justice has been violated. It is further contended that the CIT failed to appreciate that once the return is filed, the acknowledgement issued by the Department is deemed to be an assessment order under section 120 of the Ordinance the relevant portion of which reads as under:
Where a taxpayer has furnished a complete return of income (other than a revised return under sub section (6) of section 114) for a tax year ending on or after the 1st day of July, 2002.
the Commissioner shall be taken to have made an assessment of taxable income for that tax year, and the tax due thereon, equal to those respective amounts specified in the return; and
the return shall be taken for all purposes of this Ordinance to be an assessment order issued to the taxpayer by the Commissioner on the day the return was furnished.
1A) Notwithstanding the provisions of sub section (1), the Commissioner may select a person for an audit of his income tax affairs under section 177 and all the provisions of that section shall apply accordingly. [inserted by Finance Act 2005]”
5. It is contended that once the assessment is made, the provisions of section 177 are no longer applicable and the only course of action open is under section 122 of the Ordinance. It is also urged that the provisions of section 120 are not “subject to section 177” and similarly the provisions of section 177 have not used the word “notwithstanding” and that the provisions of section 177(4) have not used the word “without prejudice to sub section (1)” and, as such, the provisions of section 177 are not applicable. It is further argued that the respondent failed to appreciate that the legislature being aware of the legal provisions, have inserted sub section (1A) in section 120 of the Ordinance wherein the use of the word “notwithstanding” or non-obstante clause clearly establishes that this clause overrides the provision of section 177 of the Ordinance. Moreover, the provision of section 120 (1A) is stated to be applicable for the tax year 2005 and onwards as clarified by the Board vide Circular No.1/2005 and, as such, the selection of the case for audit for the tax year 2004 is stated to be unjustified. The learned A.R of the complainant has further contended that the CIT has erred in selecting the case for audit without waiting for the criteria from the Board in terms of sub section (1) of section 177 and, thus, by selecting the case of the complainant for audit in the absence of criteria from the Board, he has stepped in the shoes of CBR as the provisions of sub section (4) of section 177 has used the words “in addition to the selection referred to in sub section (2)” and, therefore, the selection on this score is without jurisdiction. The learned A.R has also urged that the selection of case for audit is merely on general observations and no specific grounds has been taken justifying such selection. For these reasons, it is prayed that the selection of the complainant’s case for audit of his income tax affairs be declared without jurisdiction and contrary to law and the respondent be directed to withdraw the order impugned in this complaint.
6. Responding to the allegations in the complaint, the CIT in his written report, has contended that the Commissioner is duly empowered to select the tax payer’s case for audit of his income tax affairs by virtue of section 177 of the Ordinance and that there is no requirement in law to issue a confrontation letter to the taxpayer before selection of his case for audit. It is stated that the only requirement is that reasons for selection of case for audit have to be communicated to the taxpayer which was duly done in the case of the complainant. It is also stated that the Hon’ble Supreme Court has also given a guideline to the same effect in their judgment in Civil Appeal No. 1962/2005. It is contended that the power to select the case for audit has been exercised in accordance with law and that the reasons given in the intimation letter clearly show that the Commissioner has applied his mind having regard to the factors given in clauses (a) to (d) of section 177 of the Ordinance and, as such, no maladministration is involved.
7. Parties have been heard and the record produced has been examined.
8. In support of his contention that the selection of the complainant’s case for audit is without jurisdiction as he was not confronted before such selection, the learned A.R has referred to the findings of this office in Complaint No.1422-k/05 and also judgment of the Sindh High Court in CP No.D-1225/05 in which, it is contended, that similar notice issued by the Income Tax Department for selection for audit were struck down. It is, however, observed that the facts of both these cases are distinguishable from the facts of the present case. In complaint No.C-1422 relied upon by the complainant , the case was recommended to be excluded from the list of cases selected for audit as it was found that the letter intimating the complainant regarding selection of his case for audit did not disclose any reason or grounds for such selection. So also, in the case decided by the High Court and relied upon by the complainant, it was found that the notice issued by the Department was vague, imprecise and of general nature and, therefore, the Court held it to be without lawful authority and ordered “to issue a proper notice specifying in some details the ground on which audit is sought to be undertaken”. In none of these cases was it held that prior to selection of a person for audit of his income tax affairs, the Commissioner is bound to confront such person. The law does not envisage that such person’s permission be sought or his consent be obtained for such selection. All that the rules of natural justice require is that before the Commissioner starts auditing the income tax affairs of the taxpayer, he should be informed of the grounds on which the proposed action is intended to be taken. It may be mentioned that inspite of such selection, the assessment deemed to have been completed under section 120 continues to hold the field. It is only when such audit is completed and explanation offered by the taxpayer on all the issues raised in the audit is considered that the stage comes for the Commissioner to decide as to whether the assessment completed under section 120 needs amendment or not. However, before such amendment, an opportunity of hearing is an essential requirement as mandated by sub section (9) of section 122 of the Ordinance. Through letter dated 15.05.2006, the complainant has been apprised of the case he has to meet. Thus, through this letter, it has been put on notice and the Commissioner has explained the reasons for selection of its case for audit. The objection raised in this behalf, therefore, is without merit.
9. It is also difficult to agree with the contention of the complainant that the provisions of section 177 are not applicable as the assessment already stands completed under section 120 of the Ordinance. There is a difference between the provisions of repealed Income Tax Ordinance, 1979 and the Income Tax Ordinance, 2001 regarding amending the assessment. Whereas under the repealed Ordinance, the return was selected for assessment under the normal law and procedure, under the Income Tax Ordinance, 2001 the income tax affairs of the taxpayer are first audited and it is subsequently decided as to whether the assessment is to be amended or not in consequence of such audit. Thus, as remarked earlier, inspite of such selection, the assessment under section 120 continues to hold the field and the question of amending an assessment arises only after the completion of such audit. This is also conveyed by the intimation letter/notice itself of the CIT which assures the complainant that “the audit proceedings would be closed if nothing adverse is discovered.”
10. The complainant’s contention that since the provisions of sub section (1A) of section 120 has been inserted by the Finance Ordinance, 2001 which is applicable prospectively, therefore, the selection of its case for tax year 2004 is illegal is also misplaced. The power to select the case for audit is conferred by section 177 of the Ordinance which is independent of section 120. The provision of sub section (1A) of section 120 is only clarificatory in nature which appears to have been inserted to remove any doubt regarding selection of a person for audit of its income tax affairs inspite of assessment under section 120. It merely clarifies that assessment deemed to have been completed on filing a return under section 120 would not operate as a bar to selection of a person for audit of his income tax affairs. So far as the use of the word “notwithstanding” in section (1A) of section 120 is concerned, it must be read in the context in which it has been used. A bare reading of clause (1A) makes it clear that the non-obstante clause has been used with reference to sub-section (1) of section 120 and not with reference to section 177 of the Ordinance. What sub section (1A) of section 120 conveys is that inspite of assessment deemed to have been completed under section 120, the Commissioner has the power to select a person for audit of his income tax affairs. Thus, this provisions has rather saved the powers conferred by section 177 of the Ordinance for selection of a person for audit.
11. Similarly the contention that selection is even otherwise without jurisdiction as the CBR has not yet laid down the criteria for selection as required by sub section (4) of section 177 and that in the absence of such criteria, the CIT cannot proceed on his own for selection of audit is also without merit. A plain reading of section 177 shows that sub section (4) thereof is independent of sub-sections (1) & (2). In sub section (4), it is clearly provided that in addition to the selection in accordance with the criteria laid down by CBR, the Commissioner may also select a person for audit of his income tax affairs. The use of the words “in addition” and “also” in sub section (4) of section 177 clearly suggests that besides the criteria laid down by the Board, the Commissioner may on his own select the person for audit having regard to the factors laid down therein irrespective of the fact whether the Board has laid down the criteria or not. Thus, by selecting the complainant’s case for audit inspite of absence of criteria by the Board, the Commissioner has neither usurped the powers of the Board nor has he stepped in its shoes as sub section (4) of section 177 independently invests him with the powers of selection for audit.
12. The contention that selection has been made on general observations also does not carry any weight. The CIT in his letter dated 17.05.2006, reproduced above, has given specific grounds in justification of the selection of the complainant’s case for audit. This shows that the CIT has applied his conscious judicial mind and has not acted mechanically in selection of the complainant for audit. He has incorporated the relevant grounds, reasons and clauses of section 177 of the Ordinance enabling the complainant to find out the rationale/criteria and justification for selection for audit within the scope of section 177 of the Ordinance. The impugned notice/letter meets the requirements of section 177 of Income Tax Ordinance, 2001 and thus, for reasons stated hereinabove, no case of maladministration has been made out.
13. Proceedings in the matter are, accordingly, filed.