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Tax Audits should be conducted “once in a year” which could mean either a Calendar or Financial Year, based on Departmental Practices --- Lahore High Court remanded the case as ATIR did not define “year” clearly in its annulment of an 18-month audit

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Islamabad 11-11-2024: The Lahore High Court, Multan Bench, issued a significant ruling in the case of Commissioner Inland Revenue Legal Zone, Large Taxpayers Office, Multan Vs. M/s Usman Trade Linkers, Multan (STR No. 69/2022), clarifying the scope and limits of audit authority under Section 25(2) of the Sales Tax Act, 1990. The decision impacts the interpretation of statutory limitations on audit frequency and the Inland Revenue Department’s approach to auditing taxpayers.

The core legal question in this case revolved around whether the Inland Revenue could conduct an audit spanning more than one year. Inland Revenue officers had audited M/s Usman Trade Linkers for a period covering 18 months, from July 2016 to December 2017. The Appellate Tribunal Inland Revenue annulled the audit, asserting it exceeded the permissible one-year period, but the Commissioner Inland Revenue appealed the decision.

The Court closely examined Section 25 of the Sales Tax Act, 1990, which authorizes Inland Revenue to demand taxpayer records and conduct audits. It emphasized that, while Section 25(1) allows the department to request documents as needed, Section 25(2) limits audits to “once in a year.” However, the Court noted ambiguity in the term “year,” which could be interpreted as either a calendar year or financial year, depending on departmental practice or legislative context.

The Court highlighted that the Appellate Tribunal did not clarify this interpretation, which led to an overly broad annulment of the audit. Instead, the Tribunal could have resolved the ambiguity by examining departmental intent or past practices.

The Court also referenced the Faisalabad Electric Supply Company Ltd. (FESCO) Vs. Federation of Pakistan (2019 PTD 1780) case, noting that while it provided insight into Section 25(2), it was inapplicable to this case due to subsequent amendments made by the Finance Act, 2018 and Finance Act, 2019. This underscores the importance of contextual relevance when applying precedents to statutory interpretation.

In light of these findings, the Lahore High Court remanded the case to the Appellate Tribunal, instructing it to reconsider the audit’s validity. The Tribunal is directed to interpret “year” within the meaning of Section 25(2), based on department practices or legislative intent, before determining if the audit complied with statutory limits.