Income Tax Law – Audit Procedure by Inland Revenue Explained

The Appellate Tribunal Inland Revenue (ATIR), Division Bench-I, has issued a detailed judgment outlining the structured procedure for Inland Revenue officials to conduct audits under Sections 177 and 214C of the Income Tax Ordinance, 2001. The judgment, highlighting the mandatory nature of these procedures, directs Inland Revenue officials to ensure compliance and warns of serious consequences for non-adherence.

Legal Framework for Conducting Audits

Under Section 177, the audit process begins with issuing an intimation letter, followed by reviewing taxpayer records, addressing discrepancies, and preparing a comprehensive audit report. Section 214C further governs audit selection through automated systems. The judgment emphasizes that all actions, such as best judgment assessments under Section 177(10) read with Section 121, must strictly follow procedural and legal guidelines.

Case Analysis and Structured Audit Process

The ATIR ruling, addressing a case transferred under Section 126A(4), involved an impugned order issued for tax year 2018. The tribunal examined whether the assessing officer adhered to mandatory steps before assuming jurisdiction under Section 122. These include:

1. Conducting the audit.
2. Issuing a detailed audit report.
3. Seeking taxpayer explanations on raised issues.

Critique of Deficient Audit Reports

The ATIR found the audit report in question flawed due to structural deficiencies, lack of proper findings, and insufficient legal references. A specific objection involved un-reconciled credit entries amounting to Rs98.1 million, which were deemed computationally incorrect and unsupported by evidence. The tribunal deleted this addition, declaring the assessing officer’s order legally untenable and void.

Emphasis on Transparency and Fairness

The ATIR judgment highlights the necessity of structured, transparent, and fair audit processes. It directs the Federal Board of Revenue (FBR) to circulate these guidelines among all assessing officers to ensure procedural compliance and accountability.

Modernization and Future Compliance

This judgment underscores the importance of adhering to legal frameworks to enhance procedural integrity in tax administration. It further reinforces the need for accurate, evidence-backed assessments to uphold fairness and transparency in audits conducted by Inland Revenue officials.