Illegal 'composite audit' notices issued by FBR: FTO

RECORDER REPORT

ISLAMABAD: There is no 'composite audit' provision of sales tax, federal excise duty and income tax in the Income Tax Ordinance 2011, Sales Tax Act 1990 and Federal Excise Act 2005, exposing illegal notices of 'composite audit' issued to the registered persons by the Federal Board of Revenue's (FBR) field formations.

This important order has been issued by Dr Muhammad Shoaib Suddle Federal Tax Ombudsman (FTO) on a recent complaint No.24/ISD/ST(08)/242/2012.

The FTO has clearly ruled that there is no cavil with the proposition that the Commissioner IR is competent under Section 177(1) of the Income Tax Ordinance, 2001, to issue notice for audit. However, while exercising this power, he cannot invoke the said provision of other laws. Both Sales Tax and Federal Excise laws have independent sections for audit proceedings; their consequences are different and they cannot be subjected to the provisions of Income Tax law. There is no provision of 'composite audit' available in Income Tax, Sales Tax or Federal Excise laws.

The action of Commissioner IR, Regional tax Office (RTO), Islamabad, to issue notice for 'composite audit' covering sales tax and federal excise matters simultaneously with the complainants of Income Tax affairs being without jurisdiction, and also in violation of the Sindh High Court (SHC) judgment. This tantamount to maladministration defined as under Section 2(3) of the FTO Ordinance, 2000.

The FTO has recommended the FBR to withdraw notices issued for conduct of 'composite audit' in the Complainant's case within 15 days and report compliance within five days thereafter.

The complainant is aggrieved on the Commissioner IR, RTO, Islamabad's letter, informing him that his case had been selected for 'Composite Audit' for tax year 2010. He was further informed by the Assistant Commissioner Audit, Zone-I, RTO, Islamabad to produce the relevant record relating income tax, sales tax and federal excise.

The complaint was sent for comments to Secretary, Revenue Division, in terms of Section 10(4) of the FTO Ordinance 2000. In response, the FBR forwarded comments by Commissioner IR, Zone-I, Islamabad.

During the hearing, the authorised representative (AR) submitted that the mode of selection of composite audit by the Commissioner IR, RTO, Islamabad, was unjustified, illegal and in violation of the principles laid down by the superior courts. There was no provision of composite audit in the Income Tax Ordinance, 2001, Sales Tax Act, 1990, or Federal Excise Act, 2005. He further submitted that the judgment of Hon'ble Sindh High Court (2011 PTD 1558) had been followed by the Hon'ble Federal Tax Ombudsman while deciding the complaint No.572/Lhr/IT(449/1157/2011.

He further contended that even otherwise the RTO, Islamabad, did not have the jurisdiction in the case to issue notice for conducting audit of sales tax and federal excise matters as the same lay with the Large Taxpayers Unit (LTU), Islamabad. He finally prayed that the impugned notice of selection for composite audit be vacated.

The departmental representative (DR) submitted that the Commissioner IR, RTO, Islamabad, was competent under Section 177(1) of the Income Tax Ordinance, 2001, to select any case for audit falling in his jurisdiction including the case of the complainant.

He further submitted that the notices for audit were issued on merit and in line with the criteria laid down by the FBR. He also submitted that the matter in hand was beyond the scope and jurisdiction of Hon'ble FTO as per Section 9(2) (b) of the FTO Ordinance, 2000.

As regards Departmental objection in terms of bar laid down in Section 9(2)(b) of the FTO Ordinance 2000, the matter has been examined and the objection found to be misconceived. Assessment of income per se is not the moot point in the complaint. Rather, the method adopted to determine the Complainant's income for purposes of levy of income tax and sales tax simultaneously through conduct of a 'composite audit' is what is complained against. The 'composite audit' method exposes the Complainant to double jeopardy. The departmental objection in this regard is rejected, being without merit, FTO maintained.

The contention of the Complainant that the Commissioner IR, RTO, Islamabad, did not have the jurisdiction to issue the notice of audit for Sales Tax and Federal Excise was conceded by the DR, stating that for audit proceedings of Sales Tax and Federal Excise, the LTU, Islamabad, had the jurisdiction, FTO added.