This blog is written by Mr. Sharif Uddin Khilji, FCA. Chief Executive, Khilji & Co, Chartered Accountants.
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Scope of Inquiries – Section 122(5A) of Income Tax Ordinance, 2001
Section 122(5A) of Income Tax Ordinance, 2001 (ITO 2001) provides that assessment order in respect of a tax payer can be amended if in the opinion of Commissioner, the assessment was erroneous and prejudicial to the interest of revenue. The section is pari materia to section 66A of Income Tax Ordinance, 1979 and the Courts have held through a number of reported case laws that the scope of section 66A (now 122(5A)) is limited and cannot be stretched to conduct fishing & roving inquiries or investigations. Finance Act 2012 attempted to change this position and tried to expand the scope of section 122(5A) by allowing Commissioner to conduct inquiries.
Subsequent to Finance Act 2012, a number of notices were issued to the taxpayers requiring details, information and documents in a manner that proceedings under section 122(5A) almost became identical to audit proceedings under section 177. Hence the need arose to identify the extent of scope of inquiries under section 122(5A). Honorable Tribunal explained changes made by Finance Act 2012 and scope of inquiries under section 122(5A) in a case reported as 109 TAX 85 as follows:
Quote “We also find ourselves in agreement with the contention of the AR that purpose of amendment in section 122(5A) enabling the Additional Commissioner to make or cause to make inquiry does not mean that he could make inquiry from the taxpayer. He instead, should make independent inquiries at his own end to strengthen that order sought to be amended is erroneous and prejudicial to the interest of revenue and then embark upon issuing the notice. Making inquiries or seeking information, details, documents and record from the tax payer is against the spirit of section 122(5A) even after the amendment by Finance Act, 2012.” Unquote
Owing to a large number of notices issued to conduct inquiries, a larger bench was constituted to explain the true nature and scope of inquiries that can be conducted under section 122(5A) after amendment by Finance Act 2012. Some of the important highlights of the decision (113 TAX 53) of larger bench are as follows:
- An order under section 122 is not a pre-requisite to issue notice under section 122(5A).
- Section 122(5A) is para materia to the section 66A of the repealed Income Tax Ordinance, 1979 and matter of enquiries and fishing and roving inquiries is to be seen in the context of two mandatory prescribed conditions referred in the provision. The bench mentioned that “what we are trying to highlight is that inquiry is to be in conformity with the twin conditions and should not be outside the scope of the prescribed conditions.”
- Enquiries cannot be conducted without the presence of twin criteria of “erroneous & prejudicial to interest of revenue” otherwise there would be no difference between section 177 & section 122(5A).
- Whether a notice under section 122(5A) meets the twin criteria depends on the circumstances of each case and has to be decided by respective appellate authorities in each case.
- “Definite information” is not a criterion for invoking section 122(5A) but for section 122(5) of ITO 2001.
- Section 21(c) is out of purview of section 122(5A) and requires conduct of audit under section 177.
- The learned bench noted that if the conduct of enquiries as interpreted by the respondent department i.e. unrestricted and unlimited enquiries are also allowed in section 122(5A) then there appears no difference between the two provisions and it means to conduct of audit u/s 122(5A) which power is exclusively available u/s. 177 and such definitely is not the intention of legislature.
- The bench also noted that the tax officer has first to show some substance with regard to the two mandatory conditions and thereafter he can proceed to conduct such enquiries as he deems necessary on the twin mandatory conditions.
Sharif Uddin Khilji, FCA