COMMISSIONER INLAND REVENUE (PESHAWAR ZONE), REGIONAL TAX OFFICE, JAMRUD ROAD, UNIVERSITY TOWN, PESHAWAR Versus DIAMOND FILLING AND CNG STATION, JAMRUD ROAD, PESHAWAR
ORDER
MUNIB AKHTAR, J.--- At the conclusion of the hearing it was announced that in this matter, which arises under the Sales Tax Act, 1990 ( 1990 Act ), leave to appeal was being refused. The following are the reasons for the dismissal of the leave petition.
2. Article 169 of the Constitution mandates that the Auditor General of Pakistan shall, in relation to the accounts of the Federation and the Provinces and of any authority or body established by the Federation or a Province , perform such functions and exercise such powers as may be determined by federal law. The statute currently in the field is the Auditor General s (Functions, Powers, Terms and Conditions of Service) Ordinance, 2001 ( 2001 Ordinance ). It appears that while exercising such powers and performing such functions in relation to the Federal Board of Revenue (FBR) and in particular the Inland Revenue Department in relation to sales tax, an officer of the Auditor General, the Director General of Revenue Receipt Audit (DGRRA) made an audit observation against the respondent on the basis of which the concerned officer of sales tax issued a show-cause notice dated 09.03.2023 under section 11(2) of the 1990 Act. The respondent s reply being found unsatisfactory an order for the recovery of sales tax was made against which the respondent filed an appeal to the Commissioner (Appeals). That appeal succeeded and when the Commissioner (herein after referred to as the Department) took the matter to the Appellate Tribunal, the decision of the Commissioner (Appeals) was upheld by order dated 24.10.2024. The Department took the matter further in tax reference to the High Court, which was dismissed by means of the impugned judgment. The learned High Court held as follows:
7. In the present case, the Assessing Officer has relied upon the audit observation provided by the DGRRA through its audit and has not undertaken any independent proceedings/audit and it has been settled that the DGRRA does not fall within the categories of the officers as provided under section 30 of the Act. It was held by this Court in the case of Messrs Makk Beverages (Pvt.) Ltd. (2010 PTD 1355) that since the DGAIRR does not fall within the categories of the officers as provided under section 30 of the Act, therefore, on the basis of its audit report unless the revenue conducts an independent audit no assessment order can be passed. Thus, the order of the Assessing Officer was not tenable on the aforesaid two premises. Furthermore, the Assessing Officer has invoked the provision of section 3B of the Act, however, the said provision of law is not applicable to the present case as it has never been the case of Revenue that the respondent has collected any tax from the consumer in excess of the actual payable. Therefore, the findings of the Assessing Officer on this score are also erroneous.
It is against this decision that the leave petition was presented to this Court by the Department.
3. Before us, learned counsel for the Department placed reliance on the second proviso to subsection (2) of section 25 of the 1990 Act (as it stood at the relevant time) to contend that the DGRRA had the jurisdiction to make an audit observation in cases such as that of the present taxpayer even though the taxpayer is manifestly an entity in the private sector, i.e., has not been set up or established by either the Federation or a Province. We were, with respect, not satisfied by this contention and as noted above dismissed the petition at the conclusion of the hearing.
4. Section 25 of the 1990 Act has been substituted in its entirety by the Finance Act, 2024. For present purposes it applies as it stood prior to that substitution. As so applicable it (broadly speaking and subject to certain conditions, qualifications and terms not presently relevant) required, in subsection (1), the taxpayer to produce before the concerned Commissioner the record or documents required to be maintained under the statute. Subsection (2), which is directly relevant for present purposes, then proceeded to state as follows:
(2) The officer of Inland Revenue authorized by the Commissioner, on the basis of the record, obtained under subsection (1), may, once in a year, conduct audit:
Provided that in case the Commissioner has information or sufficient evidence showing that such registered person is involved in tax fraud or evasion of tax, he may authorize an officer of Inland Revenue, not below the rank of Assistant Commissioner, to conduct an inquiry or investigation under section 38:
Provided further that nothing in this subsection, shall bar the officer of Inland Revenue from conducting audit of the records of the registered person if the same were earlier audited by the office of the Auditor-General of Pakistan.
Learned counsel for the petitioner placed reliance on the second proviso to contend that the proceedings initiated against the respondent taxpayer were valid and that the learned High Court had erred in coming to the contrary conclusion.
5. The question now before the Court has in fact already been considered earlier in this Court in C.P. No.279/2020 titled Commissioner of Inland Revenue Peshawar v. Speed Zone (Pvt.) Ltd. and a connected matter. The facts were similar inasmuch as the proceedings there against the taxpayers were also on the basis of audit observations made by the DGRRA. The taxpayers were private entities. After noting the constitutional position and sections 14 and 15 of the 2001 Ordinance, it was observed as follows: However, no power vests in the Auditor-General to audit the accounts/record of a private party under the Constitution and/or the [2001] Ordinance . Leave to appeal was refused. We are in respectful agreement. Section 15 of the 2001 Ordinance, which relates to the audit of the accounts of an authority or body established by the Federation or a Province, provides as follows:
15. Audit of companies and corporations established in the public sector. (1) The Auditor-General shall perform functions and exercise powers in relation to the audit including supplementary audit of the accounts of the public sector companies in accordance with the provisions of the Companies Ordinance, 1984 (XLVII of 1984).
(2) The duties and powers of the Auditor-General in relation to the audit of the accounts of corporations (not being companies) established by, or under, law shall be performed and exercised by him in accordance with the provisions of the respective laws.
(3) The Governor of a Province or the district authority may, where he is of opinion that it is necessary in the public interest so to do, request the Auditor-General to audit the accounts of a corporation established under provincial law and where such request has been made, the Auditor-General shall audit the accounts of such corporation and shall have, for the purposes of such audit, right of access to the books and accounts of such corporation.
Even a moment s glance will show that this section is far removed, in its intent, scope and purpose, from the audit of an entity in the private sector under, and for purposes of, a fiscal statute. The scope of the powers of the Auditor General (and therefore of any officer subordinate to him) under this provision are entirely separate and different from those under section 25 of the 1990 Act. It is therefore obvious, and has been expressly held as noted above, any person authorized to act under the former statute has no authority to act under the latter, and vice versa. This is nor merely as it should be but as it must be. This is for the reason that the Auditor General s mandate flows from the 2001 Ordinance, which in its operation, scope and intent is separate from the considerations that apply in relation to taxation under a fiscal statute. The facts and circumstances, and position, of the case at hand are beyond the scope and concern thereof.
6. As is clear from the passage extracted above from the impugned judgment, the learned High Court had relied on its own earlier decision reported as Collector of Sales Tax and Central Excise v. Makk Beverages (Pvt.) Ltd. 2010 PTD 1355 (decided on 18.09.2008). We may note that prior to the 2001 Ordinance the scope of the Auditor General s duties and powers in relation to audit had been regulated by the Pakistan (Audit and Accounts) Order 1973, which was referred to by the High Court in the cited decision but which had been repealed by section 23. However, this makes no difference to the substantive position. In the cited decision the learned High Court had observed as follows (pg.1357):
5. The case of the petitioner-department solely rests on the audit that was conducted by the Director General of Revenue Receipts Audit, Lahore (DRRA). The latter is a branch of Auditor General of Pakistan and its officers are neither sales tax officers under section 30 of the Act nor they are authorized under the Sales Tax Rules, 2005 to have access to premises and accounts of any registered unit. They do not even fall in the category of officers mentioned in section 2(28) of the Central Excises Act, 1944. The staff of DRRA is non-existent authority as for private registered units are concerned and they cannot have access to their books of accounts and other record under the sales tax/central excise laws .
The foregoing observations correctly state the law and are approved. We may note that against the cited decision, the Department had sought leave to appeal in this Court (C.P. 1580/2008) but that petition was ultimately dismissed as not pressed on 13.04.2010.
7. What however of the second proviso to subsection (2) of section 25 of the 1990 Act? (We may note in passing that the section, as substituted in 2024, appears no longer to have an equivalent provision.) In our view, though couched as a proviso it is in reality an explanatory provision. Its effect is only to clarify that any taxpayer that comes within the scope of the 2001 Ordinance and whose accounts have been audited by the Auditor General cannot for that reason alone claim immunity from an audit by an officer of Inland Revenue under section 25 of the 1990 Act. For it should be kept in mind that a company or corporation in the public sector, which comes within the scope of section 15 of the 2001 Ordinance, could also be a taxpayer under the 1990 Act, especially in light of the broad definition of company in section 2(5AA) thereof. The second proviso simply took into account the entirely separate and distinct areas of operation of the two statutes and their respective provisions regarding audit and inspection of accounts and clarified the position in relation thereto. However, to stretch it in the manner as attempted by learned counsel for the Department so as to include also private sector entities in the scope thereof and thereby allow for their audit for fiscal purposes by the Auditor General is, with respect, to completely misread, misunderstand and misapply the provision.
8. It remains only to further make clear that any audit observation made by the Auditor General in relation to the accounts of, e.g., the Inland Revenue Department or the FBR or any other governmental entity or any authority or body established by the Federation or a Province cannot form the basis of enabling or allowing any tax authority exercising powers and performing functions under a fiscal statute to regard that observation as information as would allow for the audit or inspection of the accounts or activities of a taxpayer or sustain the issuance of any notice or initiation of any proceedings under the fiscal statute. The reason is the well settled rule that that which cannot be done directly cannot be done indirectly. What is properly within the scope, powers and authority of the Auditor General acting under the 2001 Ordinance on the one hand and of the tax authorities under a fiscal statute on the other are separate and operate within their own spheres. They constitute distinct compartments which do not overlap.
9. For the foregoing reasons leave to appeal was refused and the petition stood dismissed.
UN/C-1/SC Petition dismissed.