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Self-Assessment Scheme: FTO turns down plea against random ballot

ISLAMABAD (October 11 2003): In a landmark order, Federal Tax Ombudsman former justice Saleem Akhtar has turned down the plea of three traders that the selection of their case through random ballot for full audit is contrary to the law.

The counsel for the three traders – Bahawalpur Engineering Ltd, Islamabad, Umair Shopping Centre, Rawalpindi and Hasan Carpets, Islamabad – contended that paras 9 and 10 of the Self-Assessment Scheme were illegal, contrary to the provisions of the main statute and action taken on the basis of selection for total audit was illegal and contrary to the law.

The three complainants represented by their counsel Waseem Ahmed Siddiqui, FCA, had challenged the selection of their cases for total audit under the Self-Assessment Scheme 2002.

The complainants had filed their returns for the assessment year 2002-03, which were selected by computer random ballot.

They had challenged the legality of the notice issued by the department under Section 61 of the ordinance.

In its response, the departmental representative said that the notice under Section 62 was issued to confront the complainants with discrepancies arising out of details and documents produced by them. This was legal, proper and according to the law.

Waseem Ahmad Siddiqui contended that paras 9 and 10 of the Self-Assessment Scheme were illegal, contrary to the provisions of main statute, ie Section 59, 59A, 61, 62 and 63 of the repealed ordinance.

Thus, actions taken on the basis of such selection and total audit were illegal and contrary to the law.

The counsel has also contended that the Central Board of Revenue (CBR) or any authority might select the case from among the returns filed under the Self-Assessment Scheme for assessment under Section 62 and not for total audit.

Hearing the point of view of both the sides, the FTO in his order said that to appreciate these contentions, it was necessary to have a look at the provisions of the law, particularly sections 59, 59A, 61 and 62.

On introduction of Self-Assessment Scheme it was found necessary to have random selection of returns filed under the scheme for purposes of scrutiny and assessment under Section 62. For this reason, it was provided under para 7 of the scheme that all the returns selected for total audit would not be eligible for acceptance and would automatically be subjected to total audit.

The method of selection of a case for total audit has been prescribed in para 9 of the scheme. Para 10 provides that the case would be scrutinised in detail, including field audit by departmental officers or by professional auditors authorised under Section 4A of the repealed ordinance.

It also provided that investigation and assessment proceedings would be monitored and completed under the guidance of supervisory officers within the meaning of Section 7 of the repealed ordinance.

The information collected from available sources would be utilised for determining income of the taxpayer and tax payable thereon.

DEFINITION OF TOTAL AUDIT: According to the complainants' representative Section 59 (1-A) did not permit framing of scheme for total audit but permits only to frame assessment under Section 62 without total audit or detailed scrutiny.

It has been contended that the total audit was a process of harassment to the assessee and denial of the available rights. There seems to be controversy about word 'total audit'. This term has not been defined in the repealed ordinance or the scheme.

The dictionary meaning of audit is “official examination of books and record of the entity” (Oxford Dictionary). The learned representative for the complainants has produced copy of KPMG UK services in which it has been stated as follows:

“The total audit concept (TAC) is a process by which internal and external auditors co-ordinate their work to increase the depth and breadth of assurance provided. Both the audits are performed at the same time, with smaller teams. Internal and external auditors coordinate their risk analysis, planning and execution to ensure that resources are allocated in the most effective way.

“Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation's operations. It helps an organisation in accomplishing its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.

“Throughout the world, internal auditing is performed in diverse environments and within organisations that vary in purpose, size, and structure.”

The audit, therefore, seems to be an examination of books or records of a party, entity or company.

The audits may be of different nature, eg internal audit and external audit or total audit.

It can be for the purposes of reconciliation, examination and even assessment as well. In the audit the authorised officer is required to examine in detail the books of accounts and all relevant documents which are found necessary to ascertain that the books and required records have been properly maintained by the party so audited.

FULL AUDIT JUSTIFIED: The order further adds: It is correct that the term total audit has not been defined but its meaning is clear. In para 9, it is provided that 20 percent of returns are selected for total audit, which means that full and proper checking of the record shall be carried out for the purposes of making and framing the assessment.

Total audit is merely a method to carry out a detailed inquiry for assessment as provided by Section 62.

There are various types of audit, including external audit, internal audit, corporate audit, sales tax audit and assessment audit. The concept of audit in tax administration is getting currency, particularly since the introduction of Self-Assessment Scheme.

In fact, in this system audit for purposes of detailed assessment is essential for its successful operation.

The basis of this system is trust and truthful declaration, in which returns stand accepted, except in those cases which are selected for assessment after detailed scrutiny.

The complainants' representative has referred to sub-section (1A) of Section 59 to contend that under this provision the selection could be made only for assessment under Section 62 and not for purposes of the total audit.

The Self-Assessment Scheme was framed under Section 59 (1) of the repealed ordinance, which provides for total audit and regular assessment. Sub-section (1A) of Section 59 empowers the CBR to select any case out of the returns filed under the Self-Assessment Scheme for assessment under Section 62.

There is no cavil with the contention that the cases so selected have to undergo the process of regular assessment under Section 62 or 63 as the case may be. The main point is whether during such assessment the assessee's accounts and record can be subjected to audit.

The object of para 10 of the scheme as provided is to scrutinise the return in detail, including field audit by departmental officers or by professional auditors authorised under Section 4A of the repealed ordinance.

The information collected from investigation and audit would be utilised for determining income of the taxpayer and tax payable thereon.

After audit and scrutiny the material made available can be utilised by the taxation officer to frame assessment under Section 62. If the audit and scrutiny do not reveal anything adverse to the assessee the taxation officer will frame assessment as provided by Section 62.

It has been contended that the process as provided by para 10 deprives the assessing officer of his independence as the investigation and assessment proceedings would be monitored and completed under the guidance of supervisory officers within the meaning of Section 7 of the repealed ordinance.

The assessment has to be made by the assessing officer independently and without any interference in the exercise of his powers and functions in making assessment.

Thus para 10 of the scheme does not travel beyond the repealed ordinance. As no maladministration has been proved, the case is closed, the order concluded.

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