ORDER SHEET
IN THE HIGH COURT OF SINDH AT KARACHI
Suit No.55 of 2018
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DATE ORDER WITH SIGNATURE OF JUDGE
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For hearing of CMA No.303/18 (U/O 39 Rule 1 & 2 CPC)
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06.08.2018.
Mr. Hyder Ali Khan alongwith Mr. Samiur Rehman, Advocate for Plaintiff.
Mr. Amir Buksh Metlo, Advocate for Defendant.
Mr. Umar Zad Gul Kakar, DAG.
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This is an application under Order 39 Rule 1 & 2 CPC, whereby, the Plaintiff seeks a restraining order against the Defendants from taking any adverse action against it pursuant to impugned Notices. Learned Counsel for the Plaintiff has contended that through impugned Notices at Page-35 onwards the Department intends to audit Income Tax Returns of the Plaintiff under Section 177(1) of the Income Tax Ordinance, 2001 and has called for various records and documents for which the department has not authority or jurisdiction. Per learned Counsel the Plaintiff is a Company based in and an operated from Netherlands and as per Article 7 of the Treaty between Netherlands and Pakistan, the Plaintiff is not liable to pay any tax in Pakistan, and therefore, no audit can be conducted by the department. As to objection raised by the office in respect of deposit of 50% of the disputed amount with the department as directed by the Hon’ble Supreme Court vide Judgment dated 27.06.2018 passed in Civil Appeal No.1171/2013, learned Counsel submits that the ratio of the said judgment is not applicable in the instant matter as there is no demand or assessment so far made by the department.
On the other hand, learned Counsel for the department submits that mere notices have been impugned and restraining order has been obtained, whereas, if the Plaintiff is exempted as claimed on the basis of a Treaty, the Plaintiff must satisfy the department, and if successful, as a natural consequence, notices would be withdrawn. He further submits that the Plaintiff has approached prematurely and obtained restraining orders in respect of further proceedings.
I have heard both the learned Counsel and perused the record. Insofar as the objection raised by the Office is concerned; though the learned Counsel for the Plaintiff has contended that a demand or assessment is yet to be made, therefore, the condition of 50% deposit does not arise, however, such contention does not appear to be correct and justified in view of the fact that immediately on issuance of a notice for audit this Court has been approached and a restraining order has been obtained. In these circumstances, the Department is yet to ascertain the amount, which might be payable by the Plaintiff. The Hon’ble Supreme Court in the aforesaid judgment, has not only issued directions for deposit of 50% of the calculated tax / demand; but has also directed that such jurisdiction, even otherwise, be sparingly exercised. Therefore, the Court has to see as to whether any case is made out for maintainability, even otherwise. Having said that, however, for the present purposes, I am not recording any conclusive finding and would leave it at the time of settlement of Issues that as to whether in the given facts a Civil Suit is maintainable, wherein, no demand has yet been issued, notwithstanding the directions of the Hon’ble Supreme Court as above.
Coming to the injunction application, it appears that the Plaintiff claims to be exempted from levy of any tax pursuant to a Treaty between Pakistan and Netherlands. However, this Court at the injunctive stage is not in a position to ascertain this factual aspect, which needs to be decided by the department after carrying out a proper exercise. Moreover, it is settled law that audit in itself is not an adverse action and or order, particularly in a system where the Tax Return is to be filed by a taxpayer under self-assessment and is to be treated as an assessment order of the Commissioner in terms of Section 120 of the Income Tax Ordinance, 2001. It is not in dispute that a return has been filed and department intends to audit the same in respect of claim of exemption under the treaty. If this is not permitted, then how would the department be in a position to determine any liability against the plaintiff. Further, conduct of an audit is not even an inconvenience, if a taxpayer fulfills its statutory duty by maintaining the record under the Ordinance. In this matter, before responding to the department and satisfying as to whether any exemption can be granted to the Plaintiff on the basis of Treaty, or whether the Plaintiff even qualifies under the Treaty or not, the plaintiff has approached this Court and obtained a restraining order. It does not appear to be a proper course to be adopted in such matters. The requirements of grant of an injunctive relief are otherwise lacking in this case. A learned Division Bench of this Court in the case of Messrs Pfizer Pakistan Ltd. Through Company Secretary and others v. Deputy Commissioner and others (2016 PTD 1429), while dealing with the provisions of Section 177 and 214C of the Ordinance, 2001, to the extent that whether the Commissioner had any powers to select a taxpayer for audit in view of the powers vested in FBR under Section 214C ibid, has been pleased to observe that;
6. The power to impose tax vests in the State. A taxpayer is accountable to the State for his incomes so that the leviable tax can be collected. State has every right to ensure that tax is properly calculated and paid. This obligation of a person to pay correct amount of tax means that a vested right has accrued to the State to examine the account books of a taxpayer. Audit of accounts is the most effective mode of determining the correct liability of tax. Right to conduct audit being absolute, it is hard to imagine that such a right could be left mainly to chance i.e. computer balloting or as and when the Board decides. The power of the Board to choose persons for audit is a general power which is in addition to the power of the Commissioner under Section 120(IA). How then could we hold that when the Commissioner wants to select a specific person to conduct audit, he does not have the discretion to do so under any provision of the Income Tax Ordinance, 2001. If the Commissioner is unable to select a person to conduct audit under Section 120(IA) then there would be no other provision in the Income Tax Ordinance, 2001, which would facilitate the taxing authority to examine a tax return and if circumstances suggest conduct person specific audit. If we accept the interpretation of petitioner‘s counsel then a person specific audit can never be possible even though a tax return may be required by the taxing authority to be scrutinized in detail. It may be true that frequent audit of the same person at times become a nuisance for him but to make such an effective tool to determine correct income inoperative just because Section 214C exists cannot be accepted. The Commissioner then would never be able to select a particular person for conducting audit though circumstances may exists where such a decision has to be taken. This can never be the intention of the legislature. Such an interpretation of Section 214C would make the provisions of Section 120(IA) utterly redundant. In this………. (emphasis supplied)
A full bench of the Islamabad High Court in the case reported as Pakistan Telecommunication Company Ltd. v. Federation of Pakistan (2016 P T D 1484) has been pleased to hold as under;
“27. In the context of further appreciating the powers of the Commissioner under section 177, it would be relevant to examine the consequences flowing from conducting an audit. Is audit in itself an adverse action and order, or a necessary tool to safeguard the interests of the exchequer, particularly in the context of a universal self-assessment scheme. The mere conducting of an audit may not even cause inconvenience if the taxpayer has fulfilled the statutory duty of maintaining the record prescribed under the Ordinance of 2001 or any other law. As already noted above, the scope of audit is restricted to two categories of records, documents etc. If a taxpayer has maintained the records, documents etc prescribed under the Ordinance, 2001 or under any other law at the time being enforced, the latter is not exposed to the consequences stipulated in subsection (2) of section 177. The failure on the part of a taxpayer to fulfil the statutory obligation of maintaining the prescribed record would empower the Commissioner to exercise powers envisaged under section 177(2). The legislature has, therefore, struck a balance and has provided a mechanism to safeguard the rights of both the taxpayer as well as the exchequer. The mere conducting of an audit does not create any liability or in any manner adversely effects the return treated as an assessment order under section 120. The completion of an audit has no effect whatsoever on the assessment order deemed to have been passed under section 120, as it can only be amended in the manner prescribed under section 122. In this regard the legislature has prescribed a stringent procedure and pre-conditions. Section 122 provides for the mechanism and the safeguard for amending an assessment order………..” (Emphasis supplied)
In view of hereinabove facts and circumstances of this case, I am of the view that no case for granting any injunction is made out and while dismissing the listed application, the Plaintiff is directed to reply to the Notices impugned herein and satisfy the department as to its qualification for exemption, whereas, the department on furnishing of such reply shall proceed in accordance with law.
Application stands disposed of in the above terms. Since this is a tax matter, office is directed to list this matter after 2 weeks for settlement of issues, including issue of maintainability as observed hereinabove.
J U D G E
Ayaz P.S.