ISLAMABAD (August 01 2005): Endorsing the CBR's verdict on audit under the Universal Self-Assessment Scheme (USAS), President Pervez Musharraf has set aside the judgement of Federal Tax Ombudsman (FTO) confirming that the Commissioners of Income Tax (CITs) were empowered to select any case for audit of the income tax record maintained by a person.
Sources told Business Recorder on Sunday that the Commissioners of Income Tax could use the President's verdict on audit under section 177 of the Income Tax Ordinance 2001 for settlement of pending cases, if any. As per President's judgement, it is crystal clear that the complainant cannot object to audit in view of the statutory obligation to maintain records, the added.
According to details available to Business Recorder, the regional tax authorities conveyed to a complainant that his return of income for the 'tax year 2003' had been selected for audit under section 177 read with section 120 (3) of the Income Tax Ordinance 2001.
The taxpayer approached the FTO for redressal of the grievances. The FTO recommended that commissioner shall exclude the case of the complainant for the tax year 2003 from the list of cases selected for audit. Subsequently, the commissioner made representation against the FTO's recommendations on which the President has held that FTO's viewpoint on the case was not correct.
The following is the crux of the President's judgement: The FTO has found that under section 177 of the Income Tax Ordinance 2001, the Commissioner was authorised to select any person for audit of the person's income tax affairs. But, the complainant's case has been selected on the basis of the parameters laid down by the Board, which the CBR had no power to lay down. Besides that section 177 ibid has been amended and the CBR has been authorised to lay criteria for selection of any person for an audit of person's income tax affairs by the Commissioner.
Moreover, the power being relating to procedural matter would validate the selection made by the Commissioner, it appears that the complainant has objected to its selection for audit and the Commissioner has defended the challenge to the selection before the FTO on old defunct beliefs and not after due examination and analysis of the statutory change the 2001 Ordinance has brought about.
President held that the Income Tax Ordinance 1979 did not obligate persons earning taxable income to maintain books of account. If such a person was maintaining books of account the assessing officer was obliged to make assessment on the basis of the said books, unless he would reject the books as unreliable.
But the 2001 Ordinance has obligated all persons who earn taxable income to maintain prescribed documents and records.
The FTO's findings show that the Commissioner had informed the complainant that his case has been selected for audit for assessment under the 2001 Ordinance. This was old theory under which returns were selected for regular assessment under the 1979 Ordinance. Under section 177 of the 2001 Ordinance selection is not made of the return but of the person for audit of his income tax affairs.
For what purpose the audit report will be used is a separate matter. Sub-section (6) of section 177 of the Income Tax Ordinance 2001 provides that after completion of the audit, the Commissioner may, if considered necessary, after obtaining taxpayer's explanation on all the issues in the audit, amend the assessment under section 122.
The Commissioner's notice to the complainant that its return has been selected for audit for the purposes of section 120 (3) of the Ordinance was wrong. It scared the complainant as its case has been prejudged. The FTO's approach to the complaint too proceeded on defunct theories of selection of returns for regular assessments. In view of the statutory obligation to maintain records the complainant cannot object to audit. Whether the return shall be revised on the basis of the audit report will be the question for later decision.
The scheme of the 2001 Ordinance is that the assessment may be varied on the basis of the entries in the taxpayer's books of account if any inadmissible expenses have been claimed or any income has been excluded. Best judgement can not be made if books of account are produced. The FTO's findings/recommendation cannot be sustained.
Accordingly, the President has set aside the FTO's recommendation. Legally now the commissioner is empowered to amend the notice for informing the complainant that it has been selected for audit of its income tax affairs.
Further action under Section 121 (I) (d) or 177 (6) may be taken as the matter may require.