Audit under Section 177 of the Income Tax Ordinance 2001: What It Is, the Audit Notice, and When FBR Can Initiate an Audit
Understand what an audit is under Section 177 of the Income Tax Ordinance 2001, what an FBR audit notice contains, and when audit can be initiated.
- Section 177 audit
- FBR audit notice
- audit notice contents
- departmental authorities audit
- Section 120 self assessment order
- Section 122 amended assessment
- best judgment assessment
- Section 182 penalty
- audit report FBR
- wealth statement deficiency
- taxpayer record demand
Few things concern a taxpayer more than receiving an audit notice from the FBR. Yet many taxpayers do not clearly understand what an audit is, what an audit notice contains, or when the departmental authorities can begin an audit.
This article explains the concept of audit as described in the Income Tax Ordinance 2001. It covers the step-by-step process: the self assessment order, the notice, the demand for record, the a. The topic is relevant to every taxpayer who files a return, submits a wealth statement, and declares assets.
What Is Audit Under the Income Tax Ordinance 2001?
Section 177 of the Income Tax Ordinance 2001 deals with audit. Under this section, the FBR’s departmental authorities can inquire into and investigate a taxpayer’s affairs where there is a deficiency in the return, wealth statement, or asset declaration.
How the Process Begins: The Section 120 Order
The process starts when a taxpayer submits their return and wealth statement and declares their assets. After this, an order under Section 120 is announced. This is the self assessment order.
When Do Departmental Authorities Issue a Notice?
After the self assessment order, it may come to the knowledge of FBR officials (the departmental authorities) that the taxpayer:
- did not submit the return correctly,
- did not submit the wealth statement correctly, or
- did not declare assets properly.
In other words, there is a deficiency in the return, wealth statement, or asset declaration. To recover this deficiency, and to inquire into and investigate it, the departmental authorities issue a notice to the taxpayer.
What Does the Audit Notice Contain?
The notice demands the taxpayer’s wealth statement and any other relevant record. It also contains the following details:
- the taxpayer’s name,
- the taxpayer’s address,
- the taxpayer’s CNIC, and
- the tax year.
The most important part of the notice is the legal reason for it. The notice states the legal basis on which it is issued, including the deficiency, defect, or default concerned.
The Taxpayer’s Obligation to Provide Record
Once the notice has been issued and the record demanded, the taxpayer is obliged to provide all the record demanded by the FBR to the concerned authorities.
Inquiry, Investigation, and the Audit Report
After the taxpayer provides the record, the FBR inquires into and investigates the issues concerning the taxpayer’s affairs. This is done in light of the procedures, rules, regulations, and provisions of the Income Tax Ordinance.
After the investigation, inquiry, and explanation, the FBR prepares a report, which is called the Audit Report.
Amended Assessment Under Section 122
If, after the report, the FBR concludes or finds that the taxpayer has committed a default or defect, it makes an amended assessment under Section 122. The default or defect may relate to:
- expenditures,
- asset declaration, or
- payment of tax (that is, the taxpayer did not pay the tax properly).
The FBR treats the amended assessment order as true according to its knowledge and definite information. Its position is that the taxpayer should have paid the full tax, declared assets correctly, and filed the return correctly, and did not do so.
If the Taxpayer Fails to Provide Record
If the taxpayer fails to provide the record after the notice is issued, the FBR can also pass a best judgment assessment against the taxpayer.
Penalty Under Section 182
If the taxpayer does not cooperate with the FBR authorities, a penalty under Section 182 of the Income Tax Ordinance can also be imposed. Depending on the situation, a best judgment assessment and an amended assessment under Section 122 may also follow.
Does It Matter Whether the Taxpayer Appears?
These consequences can arise whether or not the taxpayer is appearing before the authorities. If the taxpayer does not appear, the FBR authorities can still take the course of action available to them against the taxpayer after initiating the audit under Section 177.
When Can an Audit Be Initiated?
The powers under Section 177 lie with the FBR authorities. The FBR can initiate an audit at any time and in any tax year when definite information against the taxpayer comes to its knowledge. The audit can cover all such deficiencies, defects, and defaults.
Key Points at a Glance
- Section 177 of the Income Tax Ordinance 2001 deals with audit.
- After the Section 120 self assessment order, the departmental authorities may issue a notice if they find a deficiency in the return, wealth statement, or asset declaration.
- The notice demands the wealth statement and other relevant record, and states the legal reason for its issue.
- The taxpayer must provide the demanded record.
- The FBR inquires, investigates, and prepares an Audit Report.
- If a default or defect is found, the FBR makes an amended assessment under Section 122.
- Failure to provide record can lead to a best judgment assessment.
- Non-cooperation can lead to a penalty under Section 182.
- The FBR can initiate an audit at any time and in any tax year when definite information comes to its knowledge.
Frequently Asked Questions
Question: Which section of the Income Tax Ordinance 2001 deals with audit?
Answer: Section 177 deals with audit.
Question: What is the Section 120 order?
Answer: The Section 120 order is the self assessment order. It is announced after the taxpayer submits the return and wealth statement and declares assets.
Question: When do the departmental authorities issue an audit notice?
Answer: They issue a notice when it comes to their knowledge, after the self assessment order, that the taxpayer did not submit the return or wealth statement correctly or did not declare assets properly. The notice is issued to recover and to inquire into and investigate this deficiency.
Question: What information does an FBR notice contain?
Answer: It contains the taxpayer’s name, address, CNIC, and tax year. Most importantly, it states the legal reason, meaning the deficiency, defect, or default on which it is issued.
Question: Is the taxpayer required to provide the record demanded in the notice?
Answer: Yes. After the notice is issued and the record is demanded, the taxpayer is obliged to provide the demanded record to the concerned FBR authorities.
Question: What happens after the taxpayer provides the record?
Answer: The FBR inquires into and investigates the issues, prepares an Audit Report, and, if it finds a default or defect, makes an amended assessment under Section 122.
Question: What if the taxpayer does not provide the record or does not cooperate?
Answer: The FBR can pass a best judgment assessment against the taxpayer if the record is not provided. If the taxpayer does not cooperate, a penalty under Section 182 can also be imposed.
Question: When can the FBR initiate an audit?
Answer: The FBR can initiate an audit at any time and in any tax year when definite information against the taxpayer comes to its knowledge.
Conclusion
Section 177 of the Income Tax Ordinance 2001 deals with audit. After a Section 120 self assessment order, a deficiency in the return, wealth statement, or asset declaration can lead to a notice demanding record, which the taxpayer must provide. The FBR then inquires, investigates, and prepares an Audit Report. If it finds a default or defect, it makes an amended assessment under Section 122. Failure to provide record can lead to a best judgment assessment, and non-cooperation can lead to a Section 182 penalty. The FBR can initiate an audit at any time and in any tax year once definite information comes to its knowledge.
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Author and Contact Information
Ch. Muhammad Saeed, Advocate High Court
Senior Member, High Court Bar Association Lahore
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