Assessment & Audit
under Income Tax &
Sales Tax Laws
BY
ANWAR KASHIF MUMTAZ
A DVO C AT E H I G H C O U R T
S A I D U D D I N & C O.
Assessment & Audit under
Income Tax Ordinance 2001
2
ASSESSMENT
“Assessment” includes provisional assignment, re-assessment
and amended assessment and the cognate expression shall be
construed accordingly
Section 2(5)
3
TYPE OF ASSESSMENT
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Deemed Assessment
Sections 120(1), 169(3)
Best Judgment Assessment
Section 121
Amended Assessment
Section 122
Amended assessment on account
of revision of return by the taxpayer.
Section 122 (3)
Amended assessment On the basis of
definite information acquired from as audit
or otherwise
Section 122 (5)
If the assessment order is considered as
erroneous and prejudicial in the interest of revenue.
Section 122 (5A)
Provisional Assessment
Section 122 C
Provisional Assessment
Section 123
Consequential Assessment
Section 124 (1)
New Assessment
Section 124 (2)
Modification Assessment
Section 124A
Assessment in case of disputed property
Section 125
4
DEEMED ASSESSMENT
• Original and complete return shall constitute an assessment order on the
day the return is furnished.
• If the return is not complete, the Commissioner shall issue notice pointing
out the deficiencies. Section 120 (3)
• In case of non compliance of the notice the return shall be treated as
invalid Meaning thereby – no deemed order. Section 120 (4).
Section 120(1)
If a taxpayer have no other income except the income on which is subject to final
taxation, assessment shall be treated to have been made under Section 120
Section 169(3)
5
BEST JUDGEMENT ASSESSMENT
In case of non-furnishing of return, in response to Notice u/s 114(3) or 114(4),
non-furnishing of statement in compliance of notice u/s 115(5) or 143, 144 or
116 or failing to produce accounts, documents and records required to be
maintaining u/s 174, the Commissioner may make assessment to the best of his
judgment based on information or material on record.
Limitation to make such order as provided u/s 121(3) is within five years after
the end of the Tax Year or the income year to which it relates.
For making best judgment:a. History should be followed
b.There must be a speaking order
c. Should not be passed for single default
default.
d. Should be proper, fair and not dishonest
e. In the presence of deemed order u/s 120(1)
best judgment order can’t be passed
2009 PTD 638 Trib
99 TAX 329 Trib
29 TAX 192, 1987 PTD 39
1959 PTD 180 H.C.
2005 PTD 1652 Trib.
Section 121(1)
6
PROVISIONAL ASSESSMENT
In case of non-furnishing of return, in response to Notice u/s
114(3) or 114(4), the Commissioner may make provisional
assessment to the best of his judgment based on information or
material on record.
The provisional assessment order passed by the Commissioner
under section 122C(1) shall be treated as the final assessment
order after the expiry of 45 days, however if return has been filed
during the period of 45 days provisional assessment order stands
vacated.
Section 122 c
7
PROVISIONAL ASSESSMENT
If any concealed assets which in the opinion of the Commissioner
was acquired by a person from any income subject to Income Tax,
the Commissioner before issuing order u/s 121 or 122 can finalize
provisional assessment order.
from the above it can be observed that provincial order be passed
even if the order passed u/s 120 is already in field.
Section 123
8
CONSEQUENTIAL ORDER AFTER APPEAL
To give effect to the order passed by CIT (Appeal) Tribunal, High
Court or Supreme Court. The Commissioner is bound to issue
amended order within 2 years from the end of the financial year in
which the said order was served on him.
Section 124(1)
9
CONSEQUENTIAL ORDER AFTER APPEAL
If against the remand order passed by CIT (Appeal), Tribunal or
High Court if no further appeal has been filed the Commissioner is
obliged to pass new order within one year from the end of the
financial year in which such order was served
Section 124(2)
10
MODIFIED ORDER
In case any question of law has been decided in favor of the
taxpayer by High Court or Tribunal the Commissioner may follow
the said order irrespective of the fact that any further appeal or
reference has been filed by the Commissioner against the said
order. The said order shall be subjected to reversal if the question
of law so decided is reversed or modified.
Section 124 A
11
ASSESSMENT IN CASE OF DISPUTED PROPERTY
If the property from which income derives is in dispute in any Civil
Court in Pakistan, the amended assessment order is to be issued
within one year from the decision of the Civil Court.
Section 125
12
AMENDMENT OF ASSESSMENT
Commissioner may amend an assessment order treated as issued
under section 120 or issued under section 121, or issued under
section 122C .
Section 122(1)
No order shall be amended by the Commissioner after the expiry
of five years from the end of the financial year in which the
Commissioner has issued or treated to have issued the assessment
order to the taxpayer.
Section 122(2)
No assessment shall be amended, or further amended, under this
section unless the taxpayer has been provided with an opportunity
of being heard
Section13 122 (9)
AMENDMENT OF ASSESSMENT ON ACCOUNT
OF REVISION OF RETURN
Where a taxpayer furnishes a revised return under sub-section
(6)or (6A)of section 114 —
(a) the Commissioner shall be treated as having made an
amended assessment of the taxable income and tax payable thereon
as set out in the revised return; and
(b) the taxpayer’s revised return shall be taken for all purposes of this
Ordinance to be an amended assessment order issued to the
taxpayer by the Commissioner on the day on which the revised
return was furnished.
Section
122 (3)
14
AMENDMENT OF ASSESSMENT ON THE BASIS OF
DEFINITE INFORMATION
An assessment order in respect of tax year, or an assessment year,
shall only be amended under sub-section (1) and an amended
assessment for that year shall only be further amended under subsection (4) where, on the basis of definite information acquired from
an audit or otherwise, the Commissioner is satisfied that —
(i)
(ii)
(iii)
any income chargeable to tax has escaped assessment; or
total income has been under-assessed, or assessed at too low a
rate, or has been the subject of excessive relief or refund; or
any amount under a head of income has been mis-classified.]
Section15 122 (5)
AMENDMENT OF ASSESSMENT WHERE ASSESSMENT IS
CONSIDERED AS ERRONEOUS & PREJUDICIAL TO THE
INTEREST OF REVENUE.
Subject to sub-section (9), the Commissioner may, after making, or
causing to be made, such enquiries as he deems necessary, amend, or
further amend, an assessment order, if he considers that the
assessment order is erroneous in so far it is prejudicial to the interest
of revenue.
Section 16122 (5A)
Record
(1) Unless otherwise authorised by the Commissioner, every taxpayer shall
maintain in Pakistan such accounts, documents and records as may be
prescribed.
(2) The Commissioner may disallow [or reduce] a taxpayer’s claim for a
deduction if the taxpayer is unable, without reasonable [cause], to provide
a receipt, or other record or evidence of the transaction or circumstances
giving rise to the claim for the deduction.
(3)
The accounts and documents required to be maintained under this
section shall be maintained for [six]years after the end of the tax year to
which they relate[:]
[Provided that where any proceeding is pending before any authority or
court the taxpayer shall maintain the record till final decision of the
proceedings.]
Section 174
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Record
[Explanation.— Pending proceedings include proceedings for assessment
or amendment of assessment, appeal, revision, reference, petition or
prosecution and any proceedings before an Alternative Dispute Resolution
Committee”.]
[(4) For the purpose of this section, the expression “deduction” means
any amount debited to trading account, manufacturing account, receipts
and expenses account or profit and loss account.]
[(5) The Commissioner may require any person to install and use an
Electronic Tax Register of such type and description as may be prescribed
for the purpose of storing and accessing information regarding any
transaction that has a bearing on the tax liability of such person.]
Section 174
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Notice to obtain information or evidence
(1) The Commissioner may, by notice in writing, require any person,
whether or not liable for tax under this Ordinance –
(a) to furnish to the Commissioner or an authorised officer, any
information relevant to any tax [leviable] under this Ordinance as
specified in the notice; or
(b) to attend at the time and place designated in the notice for the
purpose of being examined on oath by the Commissioner or an
authorised officer concerning the tax affairs of that person or any
other person and, for that purpose, the Commissioner or authorised
officer may require the person examined to produce any accounts,
documents, or computer-stored information in the control of the
Section 176
person[; “or”]
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Notice to obtain information or evidence
[(c) the firm of chartered accountants, as appointed by the [Board
or the Commissioner], to conduct audit under section 177, for any tax
year, may with the prior approval of the Commissioner concerned,
enter the business premises of a taxpayer, [ ] to obtain any
information, require production of any record, on which the required
information is stored and examine it within such premises; and such
firm may if specifically delegated by the Commissioner, also exercise
the powers as provided in sub-section (4).]
(2) The Commissioner may impound any accounts or documents
produced under sub-section (1) and retain them for so long as may be
necessary for examination or for the purposes of prosecution.
Section 176
20
Notice to obtain information or evidence
(3)
[The person from whom information is required, may at his
option, furnish the same electronically in any computer readable
media.] Where a hard copy or computer disk of information stored
on a computer is not made available as required under sub-section
(1), the Commissioner may require production of the computer on
which the information is stored, and impound and retain the
computer for as long as is necessary to copy the information
required.
(4) For the purposes of this section, the Commissioner shall have
the same powers as are vested in a Court under the Code of Civil
Procedure, 1908 (Act V of 1908), in respect of the following matters,
Section 176
namely: —
21
Notice to obtain information or evidence
(a) enforcing the attendance of any person and examining the
person on oath or affirmation;
(b) compelling the production of any accounts, records,
computer-stored information, or computer;
(c)
receiving evidence on affidavit; or
(d) issuing commissions for the examination of witnesses.
(5) This section shall have effect notwithstanding any [law
or rules] relating to privilege or the public interest in relation to the
production of accounts, documents, or computer-stored information
or the giving of information.
Section 176
22
Audit
23
HISTORICAL PERSPECTIVE
Income Tax Act, 1922
Section 23 (1)
Section 23 (3)
Section 23 (4)
Income Tax Ordinance, 1979
Section 62 & 63
1979-80 to 2002-03
1.
2.
3.
4.
Detailed scrutiny through Pick & Choose.
Random ballot through Computer.
Total Audit.
Upto 5% of total returns filed.
24
AUDIT
The Commissioner may call for any record or documents including
books of accounts maintained under this Ordinance or any other law for
the time being in force for conducting audit of the income tax affairs of
the person and where such record or documents have been kept on
electronic data, the person shall allow access to the Commissioner or
the officer authorized by the Commissioner for use of machine and
software on which such data is kept and the Commissioner or the officer
may have access to the required information and data and duly
attested hard copies of such information or data for the purpose of
investigation and proceedings under this Ordinance in respect of such
person or any other person
Section 177
25
AUDIT
(a)
(b)
Provided that—
the Commissioner may, after recording reasons in writing call for record or
documents including books of accounts of the taxpayer; and
the reasons shall be communicated to the taxpayer while calling record or
documents including books of accounts of the taxpayer:
Provided further that the Commissioner shall not call for record or documents of the
taxpayer after expiry of six years from the end of the tax year to which they relate.
(2)
After obtaining the record of a person under sub-section (1) or where
necessary record is not maintained, the Commissioner shall conduct an audit of the
income tax affairs (including examination of accounts and records, enquiry into
expenditure, assets and liabilities) of that person or any other person and may call
for such other information and documents as he may deem appropriate.
Section 177
26
AUDIT
(6)
After completion of the audit, the Commissioner may, if considered
necessary, after obtaining taxpayer’s explanation on all the issues raised in the audit,
amend the assessment under sub-section (1) or sub-section (4) of section 122, as the
case may be.
(7) The fact that a person has been audited in a year shall not preclude the person
from being audited again in the next and following years where there are reasonable
grounds for such audits .
(8)
The Board may appoint a firm of Chartered Accountants as defined under the
Chartered Accountants Ordinance, 1961 (X of 1961)[or a firm of Cost and
Management Accountants as defined under the Cost and Management Accountants
Act, 1966 (XIV of 1966)], or a firm of Cost and Management Accountants as defined
under the Cost and Management Accountants Act, 1966 (XIV of 1966) to conduct an
audit of the income tax affairs of any person [or classes of persons and the scope of
such audit shall be as determined by the [Board][or the Commissioner] on a case to
27
case basis.
AUDIT
(9) Any person employed by a firm referred to in sub-section (8) may be authorized
by the Commissioner, in writing, to exercise the powers in sections 175 and 176 for the
purposes of conducting an audit under that sub-section.]
(10) Notwithstanding anything contained in sub-sections (2) and (6) where a person
fails to produce before the Commissioner or a firm of Chartered Accountants or a firm
of Cost and Management Accountants appointed by the Board or the Commissioner
under sub-section (8) to conduct an audit, any accounts, documents and records,
required to be maintained under section 174 or any other relevant document,
electronically kept record, electronic machine or any other evidence that may be
required by the Commissioner or the firm of Chartered Accountants or the firm of
Cost and Management Accountants for the purpose of audit or determination of
income and tax due thereon, the Commissioner may proceed to make best judgment
assessment under section 121 of this Ordinance and the assessment treated to have
been made on the basis of return or revised return filed by the taxpayer shall be of no
legal effect.]
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SELECTION FOR AUDIT BY THE BOARD.—
(1) The Board may select persons or classes of persons for audit of Income Tax affairs
through computer ballot which may be random or parametric as the Board may deem
fit.
[(1A) Notwithstanding anything contained in this Ordinance or any other law, for the
time being in force, the Board shall keep the parameters confidential.]
(2) Audit of Income Tax affairs of persons selected under sub-section (1) shall be
conducted as per procedure given in section 177 and all the Added by the Finance Act,
2013.
Provisions of the Ordinance, except the first proviso to sub-section (1) of section 177,
shall apply accordingly.
(3) For the removal of doubt it is hereby declared that Board shall be deemed always
to have had the power to select any persons or classes of persons for audit of Income
Tax affairs.]
Section 214 C
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OFFENCES AND PENALTIES—
S.
No.
7.
8.
Offences
Penalties
Section of the
Ordinance to
which offence
has reference
Any person who fails to maintain records Such person shall pay a penalty 174
required under this Ordinance or the rules of ten thousand rupees or five
made thereunder.
per cent of the amount of tax on
income whichever is higher.
Where a taxpayer who, without any
177
reasonable cause, in non-compliance with
provisions of section 177—
(a)
fails to produce the record of
Such person shall pay a penalty
documents on receipt
of first notice. of
[twenty-five]
thousand
rupees;
(b)
fails to produce the record or
such person shall pay a penalty
documents on receipt
ofsecond
of [fifty] thousand rupees; and
notice; and
(c)
Fails
to
produce
the such person shall pay a penalty
record or
documents
on of [one hundred]
thousand
receipt of third notice.
rupees.
Section
182
30
OFFENCES AND PENALTIES—
S.
No.
Offences
Penalties
Section of the
Ordinance to
which offence
has reference
9.
Any person who fails to furnish the
information required or to comply with any
other term of the notice served under
section 176.
Such person shall pay a penalty 176
of [twenty-five] thousand rupees
for the first default and [fifty]
thousand rupees for each
subsequent default.
11.
Any person who denies or obstructs the
access of the Commissioner or any officer
authorized by the Commissioner to the
premises, place, accounts, documents,
computers or stocks.
Such person shall pay a penalty 175 and 177
of twenty five thousand rupees
or one hundred per cent of the
amount
of
tax
involved,
whichever, is higher.
31
OFFENCES AND PENALTIES—
S.
No.
10
Offences
Penalties
Section of the
Ordinance to
which offence
has reference
Any person who—
(a) makes a false or misleading statement to
an Inland Revenue Authority either in
writing or orally or electronically including a
statement in an application, certificate,
declaration, notification, return, objection or
other document including books of
accounts made, prepared, given, filed or
furnished under this Ordinance;
Such person shall pay a penalty of 114, 115, 116,
twenty five thousand rupees or 174, 176, 177
100% of the amount of tax shortfall and general
whichever is higher:
Provided that in case of an
assessment order deemed under
section 120, no penalty shall be
imposed to the extent of the tax
(b) furnishes or files a false or mis-leading shortfall occurring as a result of the
information or document or statement to taxpayer taking a reasonably
an Income Tax Authority either in writing arguable position on the application
of this Ordinance to the taxpayers’
or orally or electronically
position.
(c) omits from a statement made or
information furnished to an Income Tax
Authority any matter or thing without
which the statement or the information is
false or misleading in a material particular
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Default Surcharge.—
A person who fails to pay –
[(a) any tax, excluding the advance tax under section 147 and [default
surcharge]under this section;]
(b)
any penalty; or
(c)
any amount referred to in section 140 or 141,
on or before the due date for payment shall be liable for [default surcharge]at a
rate equal to[18 per cent per annum] on the tax, penalty or other amount
unpaid computed for the period commencing on the date on which the tax,
penalty or other amount was due and ending on the date on which it was paid
Section 205
33
Audit & Assessment under Sales
Tax Laws
34
Assessment of Tax
35
Assessment of Tax
Four situations are separately dealt u/s 11 of STA
• If return is not filed and short-payment is due to any miscalculation.
• Non-payment or short payment of tax or claim of inadmissible refund for reasons
other than miscalculation.
• If tax shortfall or claim of inadmissible refund is due to some collusion or deliberate
act.
• If tax shortfall or claim of inadmissible is by reason of any inadvertence, error or
misconstruction.
• Show cause is mandatory in all above situations, which can be issued within 5 years
of relevant date i.e. the time of payment of tax or when the refund was issued
The Sales Tax Act, 1990- Section 11
The Sindh Sales Tax on Services Act 2011 Section 23 & 47
The Punjab Sales Tax on Services Act 2012 Section 24 & 52
The Khyber Pakhtunkhwa Finance Act 2013 Section 40 & 68
36
Assessment of Tax
• Taxpayer must be awarded an opportunity of being heard.
• Order-in-Original must be issued within 120 days, extendable by CIR upto 90 days,
excluding the time lapsed due to stay proceedings or ADRC or adjournment applied
by the taxpayer [not beyond 60 days].
• If taxpayer fails to file a return, the tax officer is empowered to determine the tax
liability of the registered person. Procedure for determination of minimum tax
liability described under Sales Tax General Order No.3 of 2004, dated 12 June 2004.
Sales Tax Act 1990 –Section 11
37
Assessment of Tax
• Taxpayer must be awarded an opportunity of being heard.
• Order-in-Original must be issued within 120 days, extendable by CIR upto 90 days,
excluding the time lapsed due to stay proceedings or ADRC or adjournment applied
by the taxpayer [not beyond 60 days].
• If taxpayer fails to file a return, the tax officer is empowered to determine the tax
liability of the registered person. Procedure for determination of minimum tax
liability described under Sales Tax General Order No.3 of 2004, dated 12 June 2004.
Sales Tax Act 1990 –Section 11
38
Audit
39
Types of Audit
• Routine audit of records - Section 25 of STA
• Pre or Post Refund Audit – Chapter-III of Sales Tax Rules, 2006
• Investigation/Enquiry under Section-38 & 38B of STA
• Special Audit under Section 32A of STA – By Qualified Accountants
40
Types of Audit
Routine Audit
• CIR or his authorized Tax Officer can requisition statutory records or access the
records / computers.
• On the basis of records, audit can be conducted once in a year.
• Records can be re-audited, if audited previously by Auditor General of Pakistan.
• Order to be passed under Section 11 after completion of audit.
The Sales Tax Act 1990 –Section 25
41
Types of Audit
Investigation /Enquiry
• Section 25 itself provides authority of initiating investigation under Section 38 of STA
in cases of tax frauds.
• Wide discretion of authorized officer acting on behalf of the Board or Commissioner
to access business premises, stocks, records, etc.
• Onus lies on FBR / CIR to prove the tax fraud according to definition.
• Investigations are generally assigned to DG-I&I offices of FBR.
• Section 38 does not provide authority to adjudicate
assessment/recovery can be enforced through Section 11 of STA
cases,
as
such
The Sales Tax Act 1990 –Section 38
42
Types of Audit
Audit by Special Auditors
• Audit by Chartered Accountants & Cost Management Accountants
• Audit will be conducted as per terms of reference
• Special Auditors may conduct audit of records already examined by the Department
The Sales Tax Act 1990 –Section 32A
43
Selection of cases for audit by Board
• Board is empowered to select cases for audit on random or parametric basis.
The Sales Tax Act 1990 –Section 72B
44
Audit Observation
• Audit observation needs to be responded quite seriously to avoid process of
adjudication.
• Not obligatory upon tax officers to issue audit observation
• Show cause notice be examined first on technical grounds like time limitation,
jurisdiction, etc. and then on merits.
• Imposition of default surcharge and penalties should be challenged if the malafide
intent has not be proven by the tax officer.
• Show cause notice needs to be replied in a way, which build up a strong case before
the appellate / litigation forums.
45
Audit under Provincial Laws







Audit by officer not below the rank of an Assistant Commissioner
Investigative audit in case of information regarding tax fraud or evasion of tax by
authorized officer by Commissioner
Prior notice for audit requiring to produce records or documents
Records include statutory records under any other law
Audit to be conducted once in a year unless tax fraud is established or special audit
initiated
Audit observation pointing out contraventions – 21 days time to respond by
registered person
Audit report showing demand of tax/violation of law to be issued by officer
Sindh Sales Tax on Services Act 2011 –Section 28
Punjab Sales Tax on Services Act 2012- Section 33
The Khyber Pakhtunkhwa Finance Act 2013 Section 50
46
Audit under Provincial Laws

Officer may pass an order under section 23 or section 47 and establish tax demand
alongwith default surcharge and penalty.
S-23 & 47 requires issue of show cause notice and adjudication
Voluntary compliance for payment of tax waives penalty:
--Before issue of audit notice, no penalty payable
--Before SCN, 20% penalty payable with revision of return
--After SCN, 50% penalty with revision of return
Sindh Sales Tax on Services Act 2011 –Section 28
Punjab Sales Tax on Services Act 2012- Section 33
The Khyber Pakhtunkhwa Finance Act 2013 Section 50
47
Audit under Provincial Laws

Special Audit

Board may appoint Chartered Accountant or Cost & Management Accountant by
notification for special Audit.

Special audit of the same period allowed, already audited

Special Auditor empowered as an officer

Scope of special audit in accordance with TOR
Sindh Sales Tax on Services Act 2011 –Section 29
Punjab Sales Tax on Services Act 2012- Section 34
The Khyber Pakhtunkhwa Finance Act 2013 Section 51
48
Offences, Penalties and Default Surcharge
49
Offences & Penalties
• If a person commits offenses prescribed under various provisions of law, then
penalties as provided in the ACT would be enforced.
• Penalties are waived on voluntary compliance by registered persons However,
default surcharge is payable on every late payment of tax due.
-
Non – Furnishing of return within due date
Non Issuance of invoice when required
Unauthorized issuance of an invoice in which amount of tax specified
Failure to notify material nature changes in the particular of registration
Failure to deposit the amount of tax due or any part thereof
Failure to make application for registration
Failure to maintain the required records
Non compliance with the provisions of the Act & fails to produce records .
The Sales Tax Act 1990 –Section 33
Sindh Sales Tax on Services Act 2011 –Section 43
Punjab Sales Tax on Services Act 2012- Section
48
50
The Khyber Pakhtunkhwa Finance Act 2013 Section 64
Default surcharge
• Default Surcharge: Default Surcharge is attracted in case of non payment of tax due
within due date whether intentionally or otherwise, as per the following rates:
• Non payment on account of any reason,
other than tax fraud
Inter Bank Rate plus 3% per annum of the
amount of tax due
• Non payment on account of tax fraud
2% per month (24% per annum)
The Sales Tax Act 1990 –Section 34
Sindh Sales Tax on Services Act 2011 –Section 44
Punjab Sales Tax on Services Act 2012- Section
49
51
The Khyber Pakhtunkhwa Finance Act 2013 Section 65
52