Scope of Audit under Clause 72B of Income Tax Ordinance

TAXINCOME TAX

Assad Ullah Jaral

10/3/20243 min read

brown and white tunnel during daytime
brown and white tunnel during daytime

The Sindh High Court addressed the interaction between Clause 72B and Clause 105 of the Income Tax Ordinance, 2001, concerning the audit of tax affairs of industrial undertakings (C. P. Nos. D-3073 and D-3074 of 2021). The Court clarified that Clause 72B, which mandates an audit for taxpayers receiving an exemption from advance tax under Section 148, overrides Clause 105, which provides general protection from audit if the taxpayer's affairs were audited in one of the preceding three tax years.

Background:

United Refrigeration Industries Limited and Dawlance (Private) Limited filed constitutional petitions challenging audit notices issued to them under the third proviso of Clause 72B of the Income Tax Ordinance, 2001. The petitioners contended that their tax affairs had already been audited in one of the preceding three tax years, and therefore, they were protected from further audit under Clause 105 of the Ordinance. The respondents, however, argued that the petitioners were automatically subject to audit under Clause 72B due to their exemption from advance tax at the import stage, and Clause 105 did not provide them immunity from this specific audit.

Key Issues:

Interaction Between Clause 105 and Clause 72B: Whether Clause 105, which provides general protection from audit, applies to taxpayers who have received an exemption under Clause 72B, or whether Clause 72B’s audit requirement overrides Clause 105.

Scope of Audit Under Clause 72B: Whether the mandatory audit requirement under Clause 72B applies to taxpayers who have received exemptions from advance tax at the import stage, even if they had already been audited within the preceding three tax years.

Vested Rights Under Clause 105: Whether Clause 105, which was omitted by the Finance Act, 2019, granted the petitioners a vested right against being audited, and whether such a right can be retroactively eliminated.

Court's Analysis:

Clause 72B Overrides Clause 105: The Court emphasized that Clause 72B is a specific provision that applies to taxpayers who receive an exemption from advance tax at the import stage. This clause mandates that taxpayers who enjoy this exemption must undergo an audit to ensure compliance with the consumption, production, and sales requirements associated with the exemption. The Court concluded that Clause 72B, being special in nature, overrides Clause 105, which is a general provision offering protection from audit. Clause 72B effectively requires an automatic audit as a condition of the exemption, making Clause 105 inapplicable to such cases.

Mandatory Audit for Exempt Taxpayers: The Court clarified that taxpayers who receive an exemption from advance tax under Clause 72B are automatically selected for audit under Section 214C of the Income Tax Ordinance. This selection is not subject to the general protections under Clause 105 because the audit is an integral part of the exemption process. The audit ensures that the exemption is properly applied and that the taxpayer has met the requisite conditions for its issuance.

No Vested Right Under Clause 105: The petitioners argued that Clause 105 granted them a vested right against audit. However, the Court found that even if Clause 105 had not been omitted by the Finance Act, 2019, it would not have protected the petitioners from audit under Clause 72B. The mandatory nature of the audit under Clause 72B meant that any protection offered by Clause 105 was inapplicable. Therefore, the removal of Clause 105 did not deprive the petitioners of any vested rights.

Court's Conclusion: The Sindh High Court dismissed the petitions, holding that Clause 72B, which mandates audits for taxpayers who receive an exemption from advance tax at the import stage, overrides Clause 105 of the Income Tax Ordinance. The audit was a necessary condition for the exemption, and the petitioners could not claim immunity under Clause 105. The Court also rejected the argument that Clause 105 provided the petitioners with a vested right against audit.

Contact Us:

For specialized legal guidance on tax audits, exemptions, and the interpretation of tax statutes, contact AUJ LAWYERS LLP. Our expert team offers in-depth advisory services and representation in complex tax litigation and compliance matters.

We are here to help

Talk to our lawyers today. We tailor our services around your legal needs so that we can reach the desired outcome together.