Supreme Court bars tax audits based on Auditor General observations

The Supreme Court of Pakistan has ruled that audit observations made by the Auditor General against federal or provincial government entities cannot be used by tax authorities to initiate audit or inspection proceedings against private taxpayers.

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

Dawn reported that the tax department had initiated sales tax proceedings against the private CNG station on the basis of audit observations made by the Director General Revenue Receipt Audit, a wing of the Auditor General of Pakistan. Those observations related to the accounts of the Inland Revenue Department.

Justice Akhtar held that audit functions performed by the Auditor General under the Auditor General’s (Functions, Powers, Terms and Conditions of Service) Ordinance, 2001, operate in a separate legal domain from the powers exercised by tax authorities under fiscal statutes. 

He ruled that an audit observation against a government department cannot be treated as “information” enabling tax authorities to audit a taxpayer or issue notices under tax laws.

The judgment stated that what cannot be done directly cannot be done indirectly, and that extending the Auditor General’s audit remit to justify fiscal proceedings against private entities would amount to a misreading of the law. 

The court said the constitutional mandate under Article 169 limits the Auditor General’s role to auditing the accounts of the federation and the provinces.

The case arose after a show-cause notice was issued to the CNG station in March 2023 under the Sales Tax Act, 1990, following the audit observation. The taxpayer successfully challenged the notice before 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 those findings, the Supreme Court rejected the appeal by the Inland Revenue Commissioner, affirming that audit observations against government bodies cannot be used to initiate tax proceedings against private taxpayers.