Supreme Court Bars Tax Action Based on Audit Objections

The Supreme Court of Pakistan has conclusively held that audit objections raised by the Auditor General of Pakistan against federal or provincial government departments cannot form the legal basis for initiating audit, inspection, or enforcement proceedings against private taxpayers by tax authorities.

In a judgment authored by Justice Munib Akhtar, a two-member bench dismissed the appeal filed by the Inland Revenue Commissioner, Peshawar, thereby affirming the decision of the Peshawar High Court which had set aside proceedings initiated against Diamond Filling and CNG Station, Peshawar.

According to the reported facts, the tax authorities commenced sales tax proceedings against the private CNG station solely on the strength of audit observations issued by the Director General Revenue Receipt Audit, a department operating under the Auditor General of Pakistan. These observations pertained exclusively to the internal accounts and affairs of the Inland Revenue Department itself.

Justice Akhtar categorically held that the audit jurisdiction exercised by the Auditor General under the Auditor General’s (Functions, Powers, Terms and Conditions of Service) Ordinance, 2001 exists within an entirely distinct legal framework from the statutory powers vested in tax authorities under fiscal legislation.

The Court ruled that an audit objection raised against a government entity cannot be construed as “information” for the purposes of initiating audit proceedings or issuing statutory notices against a private taxpayer under tax laws.

The judgment emphasized the settled principle that what cannot be done directly cannot be achieved indirectly, and that using audit observations of government departments to justify fiscal action against private persons would amount to a clear misinterpretation and overextension of the law.

The Supreme Court further reaffirmed that Article 169 of the Constitution strictly confines the Auditor General’s mandate to auditing the accounts of the Federation and the Provinces.

The matter arose from a show-cause notice issued to the taxpayer in March 2023 under the Sales Tax Act, 1990 pursuant to the audit objection. The notice was set aside by the Commissioner (Appeals), whose decision was upheld by the Appellate Tribunal in October 2024. A subsequent tax reference filed by the department was dismissed by the Peshawar High Court.

Upholding these concurrent findings, the Supreme Court dismissed the appeal filed by the Inland Revenue Commissioner, conclusively affirming that audit observations against government bodies cannot lawfully be used to trigger tax proceedings against private taxpayers.