PESHAWAR: The Peshawar High Court has sought comments from the Federal Board of Revenue and commissioner (inland revenue), Peshawar, on the petitions of two industrial units of the erstwhile Federally Administered Tribal Areas against their selection for audit under the income tax law.

A bench consisting of Justice Ishtiaq Ibrahim and Justice Abdul Shakoor also directed the FBR and other tax authorities not to act against the petitioners, including Bara Ghee Mills and Taj Vegetable Oil Processing Unit, until further orders.

It fixed Sept 7 for the next hearing into the petitions, which requested the court to declare illegal the notices issued to them by the commissioner (inland revenue) on the instructions of the FBR chairman for their audit in the Tax Year 2020 under the Income Tax Ordinance, 2001.

The petitioners contended that the industrial units located in the erstwhile tribal areas were exempted from income tax, so their audit was unjustified.

Stops tax authorities from acting against petitioners

The respondents in the petition are: Federal finance secretary, FBR through its chairman, FBR’s member audit, chief commissioner (inland revenue), commissioner (inland revenue) and deputy commissioner (inland revenue).

Counsel for petitioners Isaac Ali Qazi said through the Constitution (Twenty-fifth Amendment) Act the former tribal areas were merged into Khyber Pakhtunkhwa.

He said through two SROs, both issued on Oct 5, 2018, and finally through Entry No. 151 of the Sixth Schedule to the Sales Tax Act the federal government resolved to keep the businesses of former tribal areas to be remained exempted from the taxes leviable under the Sales Tax Act, 1990 and Income Tax Ordinance, 2001.

The lawyer contended that under the said SROs the industrial units in those areas were granted exemption both against substantive and procedural provisions of the income tax law.

He said the high court, in one of its judgments, declared that exemption from taxes leviable at import stage was though available, but that was subject to exemption certificate under Section 159 of the Income Tax Ordinance (ITO).

The counsel said one of the petitioner was issued the impugned notice by the commissioner (inland revenue) on July 19, 2021, informing that its returns were selected for audit for the tax year 2020. He said similar notice was also issued to the other petitioner.

Mr Qazi contended that the impugned notices were in blatant violation of law and for being based on arbitrary and flimsy grounds.

He added that the deputy commissioner (inland revenue) issued a notice on Aug 5, 2021, for proceeding with the audit.

The lawyer argued that under Section 177 (1) of the ITO, it was mandatory for the commissioner to record reasons in writing and communicate such reasons to the taxpayer for issuing any notice under that section.

He contended that no reason was assigned to the petitioners and the commissioner had merely acted upon the directions of the FBR chairman, who in a letter in June 2021 had instructed the chief commissioner of all tax offices to complete audit of ghee and cooking manufacturers within a specified timeline.

Mr Qazi said the petitioners were selected for audit contrary to section 214-C of the ITO which empowered the FBR to select persons or classes of persons for audit of income tax affairs through computer ballot, which may be random or parametric. He added that the ITO did not empowered the FBR to handpick a particular taxpayer or a class of persons for the purpose of audit.

Published in Dawn, August 29th, 2021