ISLAMABAD (August 02 2005): Federal Tax Ombudsman (FTO) former Justice Munir A. Sheikh has stopped audit of PIA's income tax return for the year 2003 by the Central Board of Revenue (CBR) due to defective order/notice, as they lacked essentials required by the law.
The FTO took this decision on an application filed by the Pakistan International Airlines Corporation (PIAC), a copy of which was made available to Business Recorder here on Monday
Facts of the case are that the PIA, a corporation controlled by the defence ministry, had filed its return of income tax for the tax year 2003 u/s 114 (1) of the Income Tax Ordinance 2001 within prescribed time by paying tax beforehand and fulfilling all requirements for the filing of return.
Through his letter dated: 8/5/2004, the DCIT, audit division, large taxpayers unit (LTU) informed the complainant that its case for the tax year 2003 has been selected for audit under section 177 of the Income Tax Ordinance 2001 by the Commissioner of Income Tax (LTU), Karachi.
Under section 177 (1), the commissioner may select any person 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 persons; and (d) any other matter that the commission considers relevant.
However, presenting his case before the FTO, the authorised representative (AR) of the PIA contended that the selection for audit was made by the Income Tax Department without any show-cause notice and without pointing out any specific ground, allegation for discrepancy justifying the selection of the case for audit in terms of section 177 (1) of the Income Tax Ordinance.
He said the PIA made a request to the income tax commissioner to pass a specific order pinpointing the clause of section 177 (1) but his office informed that the PIA was rightly selected for audit as per parameters determined by the CBR, ie, claim of refund and bad debts written off.
The authorised representative contended that section 177 did not authorise the CBR to lay down parameters for selection of case for audit for tax year 2003 and that it was only the income tax commissioner, who could select the case for audit and that, too, after specifying and recording his reasons for such a selection, which had not been done in the PIA's case.
He also cited judgements of the Lahore High Court and the Sindh High Court in support of his contentions.
Appearing before the FTO, officials of income tax contended that the mode, manner and procedure adopted in selection of the case for audit did not now show any whim or discretion and reasons for selection were duly intimated to the taxpayer, as such the whole procedure for selection was stated to be non-partisan and transparent.
They further contended that with the introduction of Universal Self-Assessment Scheme, there was all the more greater emphasise on audit because without deterrence of audit, there would be a complete lack of accountability on the part of the taxpayer, which was not the intention of the law: the only requirement of the law was that selection was not discriminatory and that reasons for such selection were intimated to the taxpayer.
After hearing arguments of rival parties and perusal of the record, the FTO observed that the same issue had come up for hearing before the Lahore High Court and the Sindh High Court and both the high courts had held the selection of the case for audit as defective and illegal.
He said facts of the case show that purported action of the department by issuing impugned notices/letters to the complainant did not meet requirements of section 177 of the Income Tax Ordinance 2001; therefore, the selection of the case of the complainant for audit was not in accordance with law and fell within the ambit of mal-administration as defined in section 2(3)(1)(b) & C of the Establishment of the Office of Federal Tax Ombudsman 2003.
The FTO observed that the department's objection that cases relied upon the complainant are not applicable in its case was also not tenable for the reason that rulings of superior courts are authoritative, and for applying law as laid down by a superior court, it was not necessary that the person relying on a case should also be a party to the case.
The FTO, therefore, recommended that “the proceedings initiated by the department on the basis of the impugned notices/letters are defective and, therefore, no further action shall follow against the complainant in pursuance of such defective notices/letters.
However, as observed by the learned high courts of Lahore and Sindh, it will be open to the department to initiate fresh proceedings of audit against the complainant but strictly in terms of section 177 of the Income Tax Ordinance 2001″.