Setting aside a staggering tax demand of Rs. 1.62 billion for the tax year 2020, the Appellate Tribunal Inland Revenue (ATIR) has rendered a key decision in favour of Sprint Oil and Gas Services FZC. Emphasizing rigorous conformity with legislative criteria when authorizing audits, the Tribunal identified basic irregularities in the process followed by the tax authorities.
Two Appeals, One Core Problem: Audit Approval Legality:
Sprint Oil contested two related issues:
- the FBR’s acceptance of a new audit notwithstanding tax law safeguards; and
- the resultant assessment order producing a significant tax burden.
ATIR handled both appeals under a consolidated ruling realizing that the legitimacy of the tax assessment was totally reliant on the legality of the audit approval.
Audit Protections under Clause (105A): A Critical Safeguard:
Clause (105A) audit protections unless specific consent is obtained from the Federal Board of Revenue (FBR), a critical safeguard clause (105A) of Part-IV of the Second Schedule to the Income Tax Ordinance, 2001 guards taxpayers from repeated audits within four years. This provision requires that such approval originate from the Board itself via a properly structured procedure, therefore guaranteeing safeguards against arbitrary re-audits.
The Tribunal Found Many Major Flaws in the Approving Process:
Allegedly, no legally valid meeting of the board approval came from a paper-based circulation among board members instead of a formal meeting. Referring to respected legal dictionaries and case law, ATIR underlined that a “meeting” calls for genuine discussions, either in person or virtually in real-time. Under Section 3(7), the FBR Act, 2007, mere written distribution does not meet legal standards.
Inappropriate Delegation without Gazette Notification:
The Tribunal decided that no appropriate delegation of power had been given to the Member (IR-Operations), even if a meeting had been legally attended to. Delegation under section 8 of the FBR Act has to be duly reported in the official gazette. This required legal criterion is not satisfied by internal communications or unsigned letters. The Member (IR-ops) lacks jurisdiction to authorize the audit without official notice.
Unlawful Authority Expansion of Board via Policies:
ATIR said that by permitting individual members to act without official delegation, certain of the FBR Rules, 2007’s provisions—more especially, Rule 3(3) and Rule 4, “inappropriately extended the Board’s powers.” The Tribunal reiterated that regulations cannot supersede or enlarge the parent statute, a concept maintained in other Supreme Court rulings, notably PEMRA against Pakistan Broadcasters Association (PLD 2023 SC 378).
Defective Approval Ruins Complete Exam:
The assessment order made under Section 121, built on this faulty basis was immediately ruled void ab initio, as the audit approval was pronounced void. By depending on the legal premise that “when the foundation falls, the entire superstructure collapses,” ATIR strengthened this conclusion as stated by the Supreme Court in Moulana Atta Ur Rehman v. Sardar Umer Farooq (PLD 2008 SC 663).
To summarize the Tribunal’s conclusions:
- The approval for audit under Clause (105A) was illegally granted.
- No valid meeting of the FBR Board took place as required by law.
- No gazette notification delegated approval powers to the Member (IR-Ops).
- Rules attempting to expand Board powers beyond the Act are invalid.
- Consequently, both the audit approval and the resulting tax assessment have been annulled.
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