Lahore, July 2, 2025 – In a landmark judgment, the Lahore High Court (LHC) has upheld the Federal Board of Revenue’s (FBR) authority to initiate audit proceedings under Section 177 of the Income Tax Ordinance, 2001, independent of ongoing reassessment proceedings under Section 122(5A).
The decision came in response to a constitutional petition filed by Honda Atlas Cars (Pakistan) Limited challenging multiple audit notices issued for tax years 2017 to 2020.
Honda Atlas argued that since reassessment orders under Section 122(5A) had already been passed and were pending in appeal for the earlier tax years, the FBR’s move to initiate audit proceedings amounted to parallel litigation, which was both burdensome and unjustified. They contended that such simultaneous actions undermined the audit process and created unnecessary hardship for compliant taxpayers like Honda.
However, the LHC rejected these assertions, clarifying that the selection of a taxpayer for audit under Section 177 is legally distinct and can proceed concurrently with reassessment. The court observed that both mechanisms serve different purposes: while reassessment under Section 122(5A) corrects an earlier tax order, the audit under Section 177 is an independent exercise to scrutinize the overall accuracy of the tax return.
Significantly, the court ruled that the FBR is within its legal rights to select multiple tax years for audit. The judges emphasized that there is no statutory limitation within Section 177 that restricts the FBR to a single-year audit. Honda’s reliance on a 2009 circular — which purportedly limited audit selection to one year — was dismissed by the court, which clarified that such circulars do not override statutory law, especially after amendments introduced through the Finance Acts of 2009 and 2010.
Moreover, the LHC found no substance in the allegation that the audit was part of an unlawful sectoral campaign targeting Honda or the automotive industry at large. The audit notices issued by the FBR contained specific reasoning and did not reference any broader policy directive. Honda’s reference to the Raza Motors case was also declared misplaced, as that judgment actually reaffirmed the FBR’s discretion to initiate audits provided they are based on recorded reasons — a requirement met in the present case.
The verdict marks a significant win for the FBR and reinforces its audit and enforcement powers. It also signals that large corporate taxpayers like Honda Atlas must be prepared for deeper scrutiny, even when reassessment proceedings are underway.