Self-assessment and audit

The taxpayers borne on the national tax number register of Pakistan are familiar with the concept of selfassessment scheme. Prior to the promulgation of Income Tax Ordinance, 2001, almost every year taxpayers were anxiously waiting for a circular bearing the subject “Self assessment scheme or universal selfassessment scheme”. In order to provide a consistent policy framework, Income Tax Ordinance, 2001 has embraced the concept of self assessment scheme through section 120. This concept is in line with the international norms of tax legislations, that is, Blind faith over the taxpayer but subject to a preventive system for intentional dishonesty, namely audit. The most striking motto of audit is of Institute of Internal Auditors [IIA], USA – In Allah [God] we trust, others we Audit – which shows the theme of audit.
The concept of self assessment scheme, as embraced by section 120 of Income Tax Ordinance, 2001, isriddled with presumptions and perceptions owing to be a new mechanism. Such presumption and perceptions of the stakeholders of returns filed under self assessment scheme turned up to be a rift situation between taxpayers and tax collectors on selection of cases for audit from the returns filed under self assessmentscheme. This article is an endeavor to give a broad pictorial representation of the scheme of assessment and audit as defined in Income Tax Ordinance, 2001 apart from practical difficulties and inherent lacunas.
SELF ASSESSMENT SYSTEM
As stated earlier, the concept of blind trust over taxpayers lies at the heart of this system subject to a preventive system for intentional dishonesty, namely audit discussed later. This system assumes that the commissioner has issued the assessment order on the date of filing of return of income in respect of taxable income and tax due as per such return.  However, such return ought to be furnished in prescribed manner as follows.

1. Return of income shall be in prescribed form and accompanied by prescribed annexure, statements or documents.
2. Return of income shall state all the relevant particulars or information including a declaration ofrecords kept by taxpayer
3. Return of income shall be signed by a person, being an individual, or person’s representative.  
4. Where a tax payer does not have national tax number certificate, return of income need to be accompanied by national tax number application form.
5. Tax due according to the return has been paid

It might be possible that a taxpayer leave a deficiency in filing return of income. The term deficiency does not include incorrect amount of tax payable on tax payable or short payment of tax payable. In such cases,the commissioner shall issue a notice to the taxpayer informing him about the deficiencies and directing him to provide such information, particulars, statements or documents by such date specified in notice.
On receiving such notice, a taxpayer should act in accordance with the requirement of the notice by the due date; the return shall be treated to be completed on the day it was furnished. In furtherance, it shall also be assumed that the commissioner has issued the assessment order on the date of filing of return of income in respect of taxable income and tax due as per such return.
In case of receiving such notice, a taxpayer does not act in accordance with the requirement of the notice by the due date, the return shall be treated as an invalid return and it will be assumed that the return was not furnished.
However, such a notice can only be issued within a tax year in which the return is filed. In other words, no such notice can be issued after the end of tax year in which the return is filed. Consequently, it shall also be assumed that the commissioner has issued the assessment order on the date of filing of return of income in respect of taxable income and tax due as per such deficient return. The purpose of this provision is to increase the efficiency of tax department, make them more vigilant and irresponsibility could be ascertained even after years.
Amendment in assessment
Commissioner can amend or further amend and assessment order on any of the following.

1. On the basis of definite information acquired from an audit or otherwise, being satisfied about the fact that
   • Income chargeable to tax has escaped assessment
   • Total income is under assessed or at a lower rate of tax than applicable rate in such cases
   • Amount under a head of income is misclassified

2. On the basis of consideration of the fact that assessment order is erroneous being prejudicial to the interest of the revenue

The term definite information includes the information about the following.

• Sale or purchase of any goods made by the taxpayer
• Receipts of the taxpayer from services rendered or any other receipt chargeable to tax
• Acquisition, possession or disposal of any money, asset, valuable article or investment made
• Expenditure incurred

It is worthwhile here to note that definite information should be fresh & must come into possession after completion of assessment or amended assessment. The term audit and its mechanism are explained at the end of self assessment order. 
Commissioner can amend or further amend an assessment order by making such alterations or additions as he/she considers necessary under any of the following cases.

1. Assessment order issued by virtue of best judgment assessment [Discussed below]
2. Assessment order treated as being issued under self assessment system or
3. Assessment order issued under any provision of the Income Tax Ordinance, 1979 [hereinafter referred to as repealed ordinance]

 A person is allowed to revise return of income after furnishing the return of income due to any of the following reasons.
1. Discovery of omission
2. Discovery of wrong statement
A revise return of income must be submitted within five years from the original date of furnishing of return. On filing of revised return, it shall be assumed that the commissioner has issued the amended assessmentorder on the date of filing of revise return of income in respect of taxable income and tax due as per such revised return.
An amended assessment can only be made within 5 years of issuance of best judgment assessment order, issuance of order under repealed ordinance or issuance of self assessment order [Deemed to be issued under section 120].
EXAMPLE
The commissioner is intending to amend the assessment order of Ehsan Limited in respect of self assessmentorder for the tax year 2004 on 1^st January, 2010. The return was filed on 31^st December, 2004.
Required
Could commissioner issue an amended assessment order – Justify your answer?
SOLUTION
The last date for the amendment in assessment for return of income submitted by the company is 30^thDecember, 2009. Five years completes on this date and the commissioner is not authorized to amend theassessment order on 1^st January, 2010.
The commissioner must not discuss the validity of issues of self assessment order which are not checked by him/her in the amended order.
An amended assessment can only be further amended, as many times commissioner considers necessary,the original assessment later of the following.

1. Within 5 years of issuance of assessment order or treated as issued a self assessment order.
2. Within 1 years of issuance of amended assessment order or treated as issued an amended order.

EXAMPLE 1
The commissioner is intending to further amend the assessment order of Ehsan Limited in respect of amended order for the tax year 2004 on 1^st January, 2010. The revise return was filed on 31^st December, 2005.
Required
Could commissioner issue an amended assessment order – Justify your answer?
SOLUTION
The last date for the amendment in assessment for return of income submitted by the company is 30^thDecember, 2010. Five years completes on this date and the commissioner is authorized to amend theassessment order on 1^st January, 2010.
The commissioner must not discuss the validity of issues of self assessment or amended orders which arenot checked by him/her in the amended order.
EXAMPLE 2
The commissioner is intending to further amend the assessment order of Ehsan Limited in respect of amended order issued by him for the tax year 2004 on 1^st January, 2009. The return was filed on 31^st December, 2005.
Required
Could commissioner issue an amended assessment order – Justify your answer?
SOLUTION
TIME LIMITATION CHECK
The last date for the amendment in assessment for return of income submitted by the company is 30^thDecember, 2009. Five years completes on this date and the commissioner is authorized to amend the assessment order on 1^st January, 2010.
VALIDITY OF ACT
The commissioner cannot amend the amended assessment order issued by him/her or his/her predecessor as he/she is only authorized to amend the original assessment order.
In furtherance, where the commissioner was already aware of an income at the time he completed the amended assessment & omitted to consider it, recourse to further amendment is not valid.
However, commissioner is bound to seek the explanation from the taxpayer by providing such taxpayer anopportunity of being heard. No amendment or further amendment in an assessment order is valid where the taxpayer has not been provided an opportunity of being heard.
Disputed Property Assessment
Separate limitation period is prescribed in the case of assessment in relation to disputed property. A person is generating income from property chargeable to tax under the head income from property and the property is in dispute in any civil court. An assessment order or amended assessment order, in respect of such income, may be issued within one year after the end of tax year in which the decision of court is received.
EXAMPLE
Mr. R is generating income from a property. Mr. E claimed that the property is in illegal possession of Mr. R and filed a case in civil court. Mr. R has asked for your opinion whether he is required to file return of income and pay tax thereon. Explain why?
SOLUTION
Mr. R ought to file the return of income and pay tax due thereon. In the event, the decision of civil court is given in favor of Mr. E; he will also be obliged to pay tax on the income from property. However, complication may arise where the slab rates of tax applicable on Mr. R or Mr. E differs.
In case the court directs the tenant to deposit the rent into the treasury which will ultimately be given to the owner according to the forthcoming decision of court and by assuming the fact that the decision of court comes on 1^stJune, 2004, a self assessment order or an amended assessment order can be issued before 30^th June, 2005 in respect of owner according to the decision.
Constituents of amended assessment order
After making an amendment in assessment or further amendment in assessment, the commissioner is obliged to issue an amended assessment order to the taxpayer. Such amended assessment order must state the following.
1. Amended taxable income of taxpayer
2. Amended amount of tax due
3. Tax paid
4. Time, place and manner of appealing the amended assessment
EVIDENCE OF ASSESSMENT
An assessment order or a certified copy of assessment order is a conclusive evidence of the due process of making of assessment that the amount and all the assessment are correct. The substance and effect of an assessment order must be in conformity with the provisions of Income Tax Ordinance, 2001. The person assessed, intended to be assessed or affected by the document [assessment order] is designated in it according to common understanding.
An assessment order could not be rendered invalid being affected by reason of any mistake, defect or omission. In furtherance, it can not be quashed [nullify, annulled or void] or deemed to be void/voidable for want of form.  
RECTIFICATION OF MISTAKE
It is also possible that an order made by the commissioner or his/her sub-ordinate staff posses a mistake.Similar to the concept of revision of wrong statement or omission in a return of income submitted by a taxpayer, this concept allows the tax machinery or appellate forum to rectify their mistake.
The prime condition for invoking this provision is that mistake must be apparent from the record – at first sight.The order needs to be amended in writing to rectify the mistake according to following.
· On own motion
· Mistake brought to the notice by taxpayer in the notice
· Mistake brought to the notice by commissioner
However, the taxpayer needs to be given a reasonable opportunity of being heard where such rectification involves.
1.Increasing an assessment
2.Reducing a refund
3.Applying adversely to the taxpayer in any manner
The commissioner or commissioner (appeals) must amend the order before the expiration of tax year next following the date on which the mistake was brought to their notice. The order shall be deemed to be rectifiedin a manner brought to the notice of concerned by the taxpayer on the expiry of time frame. Nonetheless, no amendment in the order could be made after the expiry of five years from the date of the original order.

EXAMPLE 1
The commissioner, on his own motion on 31^st December, 2010, is intending to rectify a mistake in an amended assessment order in respect of the revise return filed by Ehsan Limited for the tax year 2004. The revise return was filed on 31^st December, 2005.
Required
Discuss the validity of the action.
SOLUTION
The last date for the rectification of mistake on his motion is 30^th December, 2010. Five years completes on this date and the commissioner is not authorized to amend the assessment order on 31^st December, 2010.

EXAMPLE 2
The chief accountant of the company has applied for the rectification of mistake on 5^th March, 2006 to the commissioner in respect of an amended assessment order made by the commissioner on 31^st December, 2005. He has not received any reply till 1^st July, 2007 and consulted you in this matter.
SOLUTION
The last date for amendment in order for the rectification of mistake is 30^th June, 2007. The tax year 2006 completes on 30^th June, 2006 and the next following tax year, that is, tax year 2007 completes on 30^th June, 2007. The time period is lapsed and order shall be deemed to be rectified in a manner brought to the notice of commissioner on the expiry of time frame.

ASSESSMENT GIVING ORDER EFFECT
Commissioner shall issue an amended assessment order within two years from the end of tax year in whichthe order of the commissioner (appeals), appellate tribunal, High Court or Supreme Court was served on commissioner. Amended assessment order shall give the effect of the order made by commissioner (appeals), appellate tribunal, High Court or Supreme Court in the light of findings or direction in such order.
It might be possible the above referred order of the commissioner (appeals), appellate tribunal, High Court or Supreme Court contains any of the following directions about the
1. Exclusion of income from the computation of taxable income of a taxpayer for any year and held to included in the computation of the taxable income of another tax year of the taxpayer.
2. Exclusion of income from the computation of taxable income of a taxpayer and held to included in thecomputation of the taxable income of another taxpayer.
The assessment or amended assessment relating to that other tax year or other taxpayer shall be treated as an assessment or amended assessment made in consequence of or giving effect to the finding or direction of such order.
However, commissioner shall issue a new assessment order within one year from the end of tax year in whichthe set aside order, wholly or partly, of the commissioner (appeals), appellate tribunal, High Court or Supreme Court containing the direction was served on commissioner. The assessment proceedings in relation to new assessment order shall start from the next stage of earlier proceedings. The taxpayer is not required to re-submit any documents already furnished to the commissioner in case the order of thecommissioner (appeals), appellate tribunal, High Court or Supreme Court is the nature of a set aside or modify order.
Nevertheless, commissioner shall issue an assessment order within two months from the date of receipt oforder of the commissioner (appeals) or appellate tribunal which provides for direct relief to the taxpayer.
MODIFICATION IN ASSESSMENT ORDER
It is possible that a taxpayer disagreed with the treatment of commissioner in a tax year, say, 2003 andappellate tribunal or High Court has issued judgment according to the contention [Argument or opinion] of the taxpayer over the question of law. The commissioner is obliged to follow such decision during the proceedings of tax year 2004 even if he/she has preferred an appeal to higher forum.
However, in case the decision of appellate tribunal or High Court is reversed or modified, commissioner may modify the assessment or order in confirmation with the final decision. Modification in assessment or order must be made within one year from the date of receipt of such decision.
AUDIT
Similar to the statutory audit of financial statement by the auditor, a return of income is also subject toassessment by the commissioner. The concept of assessment bears close resemblance to the concept ofaudit. The exception is the aim and objective. The objective of an assessment is to assess the records, income tax affairs in order to check the abidance of various provisions of Income Tax Ordinance, 2001 and the accuracy of tax due and paid by the taxpayer. After satisfying him/herself, the commissioner normally issues an assessment order. The assessment order normally states the revised total income, tax due and payable, if any.  There are three types of assessment Self assessment, Best judgment assessment and Provisional assessment.
As stated earlier, the very purpose of including the concept of audit in the law is to have a preventive system forintentional dishonesty and the system of audit should serve the purpose of a deterrent of intentional dishonesty.  The procedure of audit starts from the selection of some persons for the purpose of an audit of the person’s tax affairs after giving due regards to History of compliance or non-compliance under Income Tax Ordinance, 2001, Amount of tax payable, Class of business conducted and Any other matter that the commissioner considers relevant, not in isolation.
The audit can either be conducted by the commissioner him/herself or by a firm of chartered accountants appointed by Central Board of Revenue conduct audit of persons selected by the commissioner. Such firms have the same power to enter and search premises and give notice to obtain information or evidence.However, the scope of audit to be conducted by firm of chartered accountants shall be determined by Central Board of Revenue on case to case basis.
However, this is the first time that Central Board of Revenue has followed the spirit of the honorable Supreme Court of Pakistan in 1977 SCMR 1804 at page 1810 by going out of the way which provided that “The seven instruments that are most useful in the structuring of discretionary powers are open plans, open policy statements, open rules, open findings, open reasons, open precedents and fair formal procedure.”
Commissioner is obliged to select a person at his/her own discretion but Member Direct Taxes has publicized the criterion of selection of audit, containing risk factors for risk based audit under section 177, on behalf of the concerned commissioners in accordance with the following parameters
1.   In case of corporate returns where GP rate has declined by 20 percent or more as compared to higher GP rate declared in the past two tax years;
2.   Cases of exempt units, filing returns for the first time (tax year 2003) after expiry of tax holiday/exemption;
3.   Cases where bad debts or provisions have been claimed at Rs 10 million or more;
4.   Cases claiming refund of Rs 20 million or more in Large Taxpayer Unit (LTU), Karachi and Rs 5 million or more in other regions for the tax year 2003 and
5.   In case of non-corporate returns cases claiming refund of Rs 100,000 or more for the tax year 2003 andcases declaring income of Rs 150,000 and above for the tax year 2003 where assessment in the last four years have been completed under the USAS.
Nevertheless, the commissioner may delegate the power to a sub-ordinate for conducting the audit but neither the commissioner nor his/her sub-ordinate can go beyond the Income Tax affairs and enquiry into expenditure, assets and liabilities and I have strong reservation about the announced first parameter, that is, where GP rate has declined by 20 percent or more as compared to higher GP rate declared in the past two tax years.
Normally accountants prepare profit and loss account containing three portions, that is, Manufacturing account, Trading account and operating profit and loss account in case of manufacturing concern. Modern day’s accountants prepare merely profit and loss account containing note numbers. Such notes contain cost of goods sold bearing note number of note relating to cost of goods manufactured. Section 21 of Income Tax Ordinance, 2001 is applicable on heads of expenses accounts covered under profit and loss account, that is,after Gross Profit [hereinafter referred to as GP].
In the past, for this very reason the assessing officer [taxation officer or commissioner] normally varies the GP rate and increase the quantum of GP. The present position, namely Income Tax Ordinance, 2001, has specifically curtailed this practice by enunciating the fact that taxation officer can only enquire into expenditure, asset and liabilities.
The only apparent loophole is wages in manufacturing or trading account. It might be possible that a taxpayer has not deducted tax or deducted short tax from such wages. As per circular number 4(131)-T-3/71 dated 22^nd July, 1971, a salary expense shall not be rendered inadmissible just because of tax. The prime reason is that employees normally file pays the deficient tax on 30^th September. However, additional tax may be imposed under section 205 for such short deduction. Nevertheless, where the employee claims tax credit and deductions from the total income, additional tax cannot be levied as per sub-section (2) of section 205. The said section provides the fact that additional tax needs to be refunded to the extent that it is related to tax which is held not to be payable or need not to be levied.
However, taxpayer must provide the relevant ledger accounts of manufacturing and trading account for checking the fact that tax has been deducted from relevant payments, time barred trading liability purposes, calculation of payment of advance tax under section 147 and 113.
It is worthwhile here to note that the word affair in American English means, not being defined in section 2, hence, dictionary definition applies, relationship, associations, dealings, contact and interaction. The very purpose of using this word is to check the abidance of law, for instance deduction of tax where due, filing of relevant statements etc, apart from identifying the relationship and associations for the purpose of section 108 and 109.   
On completion of audit, the commissioner may obtain taxpayers explanation on all issues raised in the audit and amend the assessment accordingly. It should kindly be noted that the word may, used in sub-section (1B) of section 177, need to be construed as must because in case the commissioner do not obtain the taxpayers explanation it tantamount to denial of fundamental right of opportunity of being heard. It is possible that a person may be selected for audit by the commissioner every year. However, commissioner is obliged to obtain taxpayer’s explanation on all issues raised in the audit and then amend the assessment.
LACUNAE FOR LA-DI-DHA
Prior to the amendment in section 74 – Tax year – the term financial year lies at the heart of Income Tax Ordinance, 2001. Section 74 was replaced by Finance Ordinance, 2002 and the term financial year was made redundant. The term is still spreading in various sections of the Income Tax Ordinance, 2001 and has not been replaced with the term tax year to date. Sub-section (3) of section 221, sub-section (6) of section 120, sub-section (1) and (2) of section 124, section 125 and sub-section (10) of section 74 are obvious examples apart from others. In furtherance, the term assessee used in sub-section (1) of section 124A needs to be replaced with the term taxpayer. 
CONCLUSION
The commissioner or his/her sub-ordinate cannot go beyond the income tax affairs and enquiry into expenditure, assets and liabilities while conducting the audit under section 177. The word may, used in sub-section (1B) of section 177, need to be construed as must because in case the commissioner do not obtain the taxpayers explanation it tantamount to denial of fundamental right of opportunity of being heard. It might be possible that a taxpayer has not deducted tax or deducted short tax from such wages. As per circular number 4(131)-T-3/71 dated 22^nd July, 1971, a salary expense shall not be rendered inadmissible just because of tax. However, additional tax may be imposed under section 205 for such short deduction but additional tax cannot be levied as per sub-section (2) of section 205 where the employee claims tax credit and deductions from the total income. The term financial year spreading all over the Income Tax Ordinance, 2001 needs to be replaced with the term tax year. The term assessee used in sub-section (1) of section 124A needs to be replaced with the term taxpayer.