' KHAWAJA NAVEED AHMAD, J.---This Suit No,1628 of 1999 has been filed by Messrs Ishtiaq Textile Mills Limited in the original civil jurisdiction of this Court against Federation of Pakistan through Secretary, Finance Division; State Bank of Pakistan through Governor, State Bank of Pakistan; and Muslim Commercial Bank Limited, New Chaili Branch, Karachi, as defendants, for declaration and injunction.
2. Briefly the facts of the case as stated by the plaintiff in the plaint are that plaintiff is a Public Limited Company carrying a business of manufacturing of Cotton Yarn exporting/selling in the local market. Defendant No,1 has announced a scheme know as "Pay-As-You-Earn Scheme Act, 1973" for the purposes to facilitate the importers to import machinery/equipment on credit for establishment of industrial unit in foreign exchange, as may be prescribed, was to be met from out of the export earnings of such industrial unit or enterprise. The said scheme was regulated by the defendant No,2, State Bank of Pakistan ("SBP"), on behalf of the Government of Pakistan vide Notification dated 20-3-1973, which inter alia provides that an industrial unit or enterprise shall be liable to pay to the SBP, the defendant No,2, by way of penalty a sum not exceeding 27 per cent of the value in Pakistan Rupee if the percentage of the export earnings is not sufficient to meet the cost of the machinery and equipment and other prescribed charges in foreign exchange. The Act of 1973 further provides that the SBP could levy 27% penalty on the amount by which export earnings of the industrial unit or enterprise shall fall short of the aggregate of the cost and charges referred to in Rule 4 of the said Act. Rule 4 is reproduced as under:-- "If in any financial year, any industrial unit or enterprise is not in a position to meet any of its liabilities specified in Clause 7 of the Scheme from within fifty per cent of the earnings specified in that clause, or from within such higher percentage of the said earnings as may have been allowed under the said clause, the Federal Government may allow payment, at the official rate of exchange, of the amount of foreign exchange required to meet the liabilities, subject to the condition of a penalty equal to twenty seven per cent of the value in Pak Rupees of the amount of such foreign exchange."
3. The plaintiff, in order to establish its textile mill, entered into a contract with Messrs C.ITOH & Co.
(H.K.) Limited, to import textile machinery. The total cost of the machinery including interest was Rs,123,556,071. The plaintiff paid a sum of Rs,9,215,578 being 10% of the contract amount was paid to the suppliers at the time of signing of contract and a sum of Rs,4,445,900 being 5% of the contract amount at the time of opening of L/C. Balance 85% amounting to Rs,109,894,593 was repayable in 12 biannual instalments commencing from 16-4-1990 upto 16-10-1995. The plaintiff further states in the plaint that during the period from July, 1989 to October, 1995 it realized a total amount of Rs,182,296,453 by exporting its manufactured yarn whereas the total price payable to the suppliers of machinery was Rs,109,894,593.00.
4. However, according to the contents of the plaint, there was short earning of foreign exchange for the years 1991-92, 1992-93 and onwards, which is as under:-- Financial Year Realized in Rs. 50% of realized for repayment Rs.Repayment Rs. Excess (Short)
Rs.
July, 1989 To une, 199035,226,703 17,613,352 15,571,091 2,042,260 July, 1990 To June, 199197,674,606 48,837,303 19,248,596 29,588,707 July, 1991 To June, 199216,255,283 8,127,642 18,315,765(10,188,124)
July, 1992 To June, 199316,217,809 8,108,905 17,382,935 (9,274,031)
July, 1993 To June, 199416,922,052 8,461,026 16,450,105 (7.989.079)
July, 1994 To Oct., 1995 15,517,274 (15,517,274)
July, 1995 To Oct., 1995 7,408,826 (7,408,826)
Total 182,296,453 91,148,227 109,894,593 (18,746,366)
5. The reason for shortage in the earnings has been given in the plaint to the effect that export of yarn was banned by the Government from January, 1994 to July, 1994. Apart from this, the following were the reasons for the shortage in the earnings:--
(i) Bad law and order situation in the Dadu District, strikes, abduction cases, demand of ransom and Bhatta on a regular basis which affected the supplies, labour, material and free movement of the goods.
(ii) Cotton crop in the year 1993-94 in Pakistan was badly affected because of which Government of Pakistan became importer of cotton. The plaintiff had also imported cotton from America but the quality of that cotton was of very inferior quality, therefore, the poor quality of yarn which could not be exported, was sold in the local market on throwaway price;
(iii) On account of poor quality of cotton, the plaintiff s production of yarn was reduced from 4,556,628 kgs. To 4,245,007 kgs, the difference being 311,621 kgs; and
(iv) Japan had imposed anti-dumping duty in 1994 because of which the export of yarn from Pakistan was reduced considerably.
6. The plaintiff states that it had already got its foreign exchange risk covered by making payment of 3% per annum on the total amount of the instalment and has paid Rs,11,538,558 in this account.
The plaintiff further stated in the plaint that the defendant No,2 in spite of full knowledge of the plaintiffs foreign exchange earnings paid difference between booked value of Japanese Yen and the prescribed rate prevalent at the time of remittance at which rate the plaintiff used to purchase Yen for remittance. As the defendant No,1 did not raise any objection regarding not meeting the target, the plaintiff remained under belief that their obligations are approved by the defendants Nos.1 and 2. It is the further case of the plaintiff that after the remittance of entire amount of price and interest thereon to the suppliers, the defendant No,1 on or about 16-4-1996 intimated that the plaintiff has allegedly short export the goods and illegally and unlawfully levied a penalty and interest to the tune of Rs,39,298,709.
7. The plaintiffs further stand is that the defendants Nos.1 and 2 had acted indiscriminately against the plaintiff as in many cases like Kofcot Textile Mills Ltd., Gushan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd., no penalty was imposed on them in spite of the fact that their performance was far inferior to that of the plaintiff.
8. The plaintiff, therefore, has filed this Civil Suit on 12-11-1999 against the Islamic Republic of Pakistan, State Bank of Pakistan and Muslim Commercial Bank Ltd., defendants Nos.1 to 3 respectively, seeking following prayers:--
(i) A declaration to the effect that the levy of penalty of amount of Rs,39,298,709 by the defendants 1 and 2 is illegal, unwarranted and without any basis and without any show-cause notice to the plaintiff and the said amount together with mark-up/interest and excise duty Rs,382,536 as calculated by the defendant No,3 is liable to be refunded by the defendants Nos.1 and 2 to the defendant No,3 and that the plaintiff is not liable to pay the same to any defendant.
(ii) A declaration to the effect that the Rules framed under "Pay-As-You-Earn Scheme Act, 1973" are ultra wires and in excess of delegation and liable to be struck down as such.
(iii) An injunction restraining the defendants from declaring and treating the plaintiff as defaulter and restraining the defendant No:3 from demanding and/or recovering any amount due to wrong penalty or mark-up thereon.
(iv)Costs of suit.
(v) Any further/other/additional relief or reliefs which this Hon'ble Court may deem fit and proper in the circumstances of the case."
9. Notices were issued to the defendants and on 27-4-2000 the defendants Nos.2 and 3 filed their written statements denying the averments made in the plaint. The defendant No,2 submitted that Pay-As-You-Earn Scheme was announced to enable entrepreneurs to import machinery for the establishment of industrial units or enterprises on credit and to pay for the cost of machinery and equipment so imported and other permissible charges in foreign exchange out of the export earnings of the industrial units or enterprises. The defendant No,2 further stated in the written statement that the exchange risk coverage scheme has no nexus with the earning and remittance of the amount under Pay-As-You-Earn Scheme, both the schemes are different and exchange risk coverage scheme provides protection from fluctuating rate of foreign exchange. The defendant No,2 further stated in the written statement that penalty was charged as per the Scheme and no discrimination has been made with the plaintiff. It is further submitted by the defendant No,2 that as per the provisions of Rules governing the Scheme the amount realized in foreign currency is countable for financial year July to June and excess balances, if any, is not carried over to next financial year as shown in the chart given by the plaintiff. The defendant No,2 prayed for dismissal of the suit with cost. The defendant No,3 in its written statement has also denied the averments made in the plaint. The defendant No,3 submitted that the plaintiffs earnings come to Rs,172,875,963.29, whereas they were entitled to export upto Rs,367,613,042 but they failed to do so and the shortfall of Rs,194,737,078.71 occurred, therefore, the defendant No,2 rightly levied penalty at the rate of 27% and penal interest at the rate of 9% and recovered the amount of penalty amounting to Rs,38,253,762.00 plus Rs,224,021.00 (total comes to Rs,38,477,783.00 )under the Scheme. It is further submitted by the defendant No,3 that the defendant No,2 prior to imposing the penalty issued notices to defendant No,3 vide letter dated 22-9-1993, which was forwarded to the plaintiff by the defendant No,3 vide letter dated 3-10-1993, photocopies whereof have been annexed as R and R-1 respectively. It is further submitted by the defendant No,3 that the plaintiff opened letter of credit and also entered into an agreement for irrevocable documentary credit freely negotiable in beneficiary's country. The defendant No,3 further stated in its written statement that it repeatedly wrote letters to the plaintiff that due to shortfall in exports the defendant No,2 may impose penalty at the rate of 27 % per annum plus interest. At the rate of 9 %, if they failed to supply the documents of earnings statement during the year 1993-94, 1994-95 and 1995-96 immediately to the defendant No,2. Consequently, on the failure of the plaintiff, the defendant No,2 vide letters dated 11-4-1996 and 25-10-1997 imposed penalty of Rs,38,253,762.00 and Rs,224,021.00, total to Rs,38,477,783 and recovered the said penalty from defendant No,3. Thereafter the defendant No,3 wrote to the plaintiff for repayment of the penalty amount to it but the plaintiff on one pretext or the other avoided to pay the same and all the time they informed the defendant No,3 that they are settling the matter with the defendant No,2. According to the defendant No,3, it has rightly debited the amount of penalty and mark-up thereon as levied by the defendant No,2 and recovered from him on behalf of the plaintiff, the defendant No,3 has every right to recover the outstanding amount from the plaintiff in view of the agreement, documents of letter of credit and consent given by the plaintiff.
10. On 21-8-2000 the Court appointed Mr. Ghafoor Ahmed, Advocate as commissioner to record evidence while on 6-9-2000 following issues were adopted:--
(i) Whether the short export of yarn was wilful on the part of the plaintiff?
(ii) What is the effect of booking foreign exchange risk at 3 % per annum for the purposes of remitting the instalment?
(iii) What is the effect of the defendant No,2 not raising objection regarding the short earning of the foreign exchange?
(iv) Whether the defendants Nos. 1 and 2 have rightly charged penalty as per rules and laws?
(v) Whether the defendants Nos. 1 and 2 have discriminated against the plaintiff inasmuch as they did not charge penalty from various mills as mentioned in para 12 of the plaint?
(vi) Whether the defendant No,2 has charged penalty as per the rules and laws in force?"
11. The plaintiff has examined one witness, namely, Dewan Imran who filed his affidavit-in-evidence on 7-10-2000 before the Commissioner who was appointed to take evidence of the parties and he has been cross-examined by the defendants Nos.1, 2 and 3. The defendant No,1 has not examined any witness. Defendant No,2 examined its witness Shabbir Ahmed (exhibit 46) who also filed his affidavit-in-evidence (Exh.47). Defendant No,3 has produced two witnesses, firstly Muhammad Taufiq who filed his affidavit-in-evidence (Exh.74) and secondly Maqbool Naeem (Exh.99) who also filed his affidavit-in-evidence (Exh.100). The defence witnesses were also cross-examined by the learned counsel for the plaintiff. On 12-4-2002 the learned counsel for the defendant No,1 has made a statement that the defendant No,1 adopts the evidence recorded on behalf of the defendant No,2.
12. On 26-8-2002 the learned Commissioner returned the commission after recording evidence and thereafter the matter was fixed for final arguments.
13. Mr. Mansoor-ul-Arfin, learned counsel for the plaintiff has argued that the plaintiffs witness Dewan Muhammad Imran Farooqui in para 8 of his affidavit-in-evidence gave the reasons of shortage in the production of the yarn by the plaintiff and consequent short-export thereof and earning in foreign exchange required under the Scheme. The plaintiffs reiterated the contents of the plaint and in reply to a question put by Mr. A. Tariq Ali, Advocate for defendant No,1 the witness has stated that "it is correct to suggest that the target of earning could not be achieved due to the imposition of restriction of import in Japan. Voluntarily states that this is not the only reason for shortfall in the earning." The learned counsel further pointed out that to another question put to the witness that Japan had not imposed restrictions on the plaintiffs mill, the witness replied that imposition was general and not for specific mill. This question was repeatedly asked from the plaintiffs witness and every time, his reply was same. However, no question was put to this witness as to other reasons of shortfall given in plaint as well as in his affidavit-in-evidence. The law is that if on a particular point, there is no cross-examination, the point stands proved and admitted by the other party to be correct. Thus it is established that the shortfall in the export of the goods was not wilful. The learned counsel further submitted that the case of the plaintiff is that the defendants Nos.1 and 2 did not suffer any loss as the plaintiff has been making payment of 3 % as foreign exchange risk cover for the purposes of remitting the same to the supplier. He also submitted that the defendants 1 and 2 also did not suffer any loss on shortfall of export earnings.
14. Mr. Mansoor-ul-Arfin, learned counsel for the plaintiff, further submitted that regularly necessary information was being forwarded to the defendant No,2 and yet it did not take any objection as to the shortfall nor did it give any warning to the plaintiff about the shortfall earning of the plaintiff. He pointed out that in para. 19 of the affidavit-in-evidence, the plaintiffs witness has stated that it was after remittance of the entire amount of price and interest thereon to the supplier that the plaintiff was informed after 11-4-1996 about the alleged shortage and deduction of penalty and interest thereon. He also pointed out that in para 18 of the affidavit-in-evidence, the plaintiffs witness has specifically stated that although the defendants Nos.1 and 2 were in the knowledge of plaintiffs not meeting the target, the defendant No,1 did not take any objection and thereby waived their right to levy any penalty and had such objection been taken in time, the plaintiff would have tried to purchase the yarn from the market for export to meet the target. According to the learned counsel, this statement was not questioned in cross-examination by either of defendants. However, the fact remains that no notice was served on the plaintiff prior to levy and recovery of penalty and interest thereon as is the requirement of every statute. According to the learned counsel for the plaintiff, the principle of natural justice is that every party who is going to be affected by the act should be afforded an opportunity to explain. In this regard he pointed out that in cross-examination, the witness of the defendant No,2 was specifically put the following question:- "Did you call the plaintiff to explain the reasons when on post facto checking the State Bank came to know that there was a shortfall in the target?"
' The answer of the witness was that since the defendant No,3 was authorized dealer, they call the documents from them and finally the witness replied that "it is correct to suggest that we did not give an opportunity to the plaintiff to meet the target before imposing the penalty." He also submitted that again the said witness in cross-examination has admitted that "it is correct to suggest that no notice was given to the plaintiff before charging the interest'. He also pointed out that the Muhammad Taufiq (Exh. 73), defendant's witness, in cross-examination to the plaintiffs counsel also admitted that "the SBP or the Government had not sent any notice to MCB calling any explanation for not reaching the target". The learned counsel for the plaintiff has submitted that the admitted position is that no notice was sent to the plaintiff to explain the shortfall and/or to meet the shortfall. As such, the imposition of penalty and interest was unlawful.
15. Advancing arguments on Issues Nos.4 and 6, the learned counsel for the plaintiff submitted that penalty could not be charged under the Scheme or rules framed thereunder as the imposition and the recovery are against the principles of natural justice as stated above and further there is no assertion from either of the defendants that there was wilful default on the part of the plaintiff. He submitted that there is no evidence from the side of the defendants that the shortfall in export was wilful on the part of the plaintiff. According to the learned counsel for the plaintiff, in any event, no penalty could be imposed after taking into consideration all facts and circumstances of this case, in view of the evidence brought on record and the averments which had not been denied by the either of the defendants and the same has not been subjected to any cross-examination from the defendant's side. The learned counsel in support of his arguments has relied upon the case of Neelam Textile Mills. v. State Bank of Pakistan PLD 1999 Karachi 433 to the effect that the expression "liable to pay" occurring in section 4 of Pay-As-You-Earn Scheme Act indicates that the legislature intended to confer a certain amount of discretion upon concerned authorities to levy or not to levy a penalty or levy penalties, in different amounts depending upon gravity of offending act. In the cited case, a learned Division Bench of this Court set aside levy of penalty holding that the same was without proper authority and of no legal effect and the State Bank of Pakistan was directed to refund the amount to the petitioner within three months. The learned counsel placed special reliance on the following observation made in paragraph 15 at page 440 of the above judgment, which is reproduced as under:-- "........................... It is, therefore evident that framers were conscious of the fact that at times it might not be possible for an importer of machinery to generate sufficient foreign exchange earnings for reason beyond his control, and therefore, ample discretion was conferred upon the Government to provide appropriate relaxation in a fit case. We, therefore, find considerable force in Khawaja Shamsul Islam's contention to the effect that penalty could not be imposed in the absence of a definite finding of wilful default on the part of the petitioner and in any event, it could only be imposed after taking into consideration all the facts and circumstances of a particular case. It would be highly incongruous to assume that while a person obtaining foreign exchange in advance and yet failing to import machinery will escape penalty if he repatriates the amount after expiry of the time allowed for import, but one, who generates foreign exchange through export earnings and repatriates all such earnings would be mechanically liable to penalty merely because the amount was repatriated after a particular date. We are, therefore, of the view that if Rule 4 is construed in the manner suggested by Mr. Rehmani, the same would be liable to be struck down as being repugnant to the parent Act and ultra vires the rule making power."
' In respect of the above cited case, the counsel for the defendant No,2 has contended that leave has been granted by the Hon'ble Supreme Court. However, no stay of recovery was granted. In fact, the amount of penalty has been refunded as per Court's order. The learned counsel further placed reliance on the following two reported cases:--
(i) Suleman Spinning Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 324.
(ii) Colony Thal Textile Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 518.
16. In the first case quoted herein-above, it has been held that the words "shall be liable to pay" under section 4(2)(b) of the Pay-As-You-Earn Scheme Act, 1973 calls for a determination by SBP that the establishment has committed some violation of the Act for the reasons in its control and then proceed to decide whether or not any penalty is liable to be paid, if so, at what rate? The Court further held that Rule 4 of Pay-As-You-Earn Scheme is ultra vires the main Act and has therefore no effect. For these reasons, the penalty imposed directly was ordered to be refunded immediately.
It was further held that Rule 4 is ultra vires the main Act inasmuch as in section 4(2)(b) of the Act, there was a discretion to levy penalty at any rate not exceeding 27 % but Rule 4 made it mandatory and it took away the power of SBP whether or not to levy any penalty after determining whether violation of the Act was within or beyond the control of the party. Appeal against judgment of this case was dismissed by a Division Bench of the Lahore Court. In the second case of Colony Thal Textile Mills Ltd. It has been held that penalty cannot be imposed automatically by the Federal Government or the State Bank of Pakistan, but the concerned authority should grant hearing to the person and pass any order under section 4(2) of the Act.
17.
17. While advancing arguments on Issue No,5, Mr. Mansoor-ul-Arfin submitted different mills, including Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd. Have not been subjected to levy of penalty although their cases were worst than the plaintiff. He pointed out that the witness of the defendant No,2 produced the recommendation of the Finance Ministry, Government of Pakistan in the case of Fawad Textile Mills Ltd. Which was not subjected to the penalty. However, this witness refused to produce the cases of Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd., Ibrahim Textile Mills Ltd. And Imran Spinning Mills Ltd. Although notice under Order XII, C.P.C. Was served to produce these files. However, it was not denied that no penalty was imposed on these mills. According to the learned counsel, illustration (e) to Article 129 of Qanun-eShahadat lays down that if a party does not produce the evidence in its possession, it would be deemed that the production thereof would be unfavourable to the party who withholds it.
He submitted that Exh. 18 is the letter dated 3-10-2000 from the State Bank of Pakistan to the counsel of the plaintiff under cover of which a letter dated 18-9-2000 (Exh. 20) from Zafar Hassan Reza, Secretary, (IFR), Government of Pakistan, Finance Division, External Finance Wing has been produced. Para. 4 of this letter admits that Ministry of Industries had granted relaxation condonation of Kofcot Textile Mills Ltd., Gulshan Spinning Mills Ltd. And Imran Spinning Mills Ltd. He further pointed out that on Exhibit 44, a representation from the plaintiff, there is a note from the plaintiff and which has been certified by Tanweer Hussain, Assistant Economic Advisor, Finance Division, Government of Pakistan, which admits a concession was given to the above Mills. He further pointed out that exhibit 45 has been produced which is from the Government of Pakistan, Finance Division, External Finance Wing, which shows that it was also given relaxation and condonation of penalty. The learned counsel also pointed out that in cross-examination, the witness of the defendant No,2 Shabbir Hussain (Ex.46) has admitted that above Mills had also registered their contracts under Pay-AsYou-Earn Scheme. When pointedly, it was asked that other Mills had not met the target, he stated that he will have to check the record. Again, the witness in his cross-examination held on 16-11-2001 admitted that he had brought the files of Imran Spinning Mills. Ltd. And that penalty was imposed on this Mill but subsequently refunded by the Ministry of Finance and the Ministry condoned the penalty. The witness had not brought the files of other Mills.
Mr. Mansoorul-Arfin contended that plaintiff has been discriminated against and his case is fully covered by Neelam Textile Mills Ltd. v. State Bank of Pakistan supra where a Division Bench of this Court had termed it as hostile discrimination and it was held that it violated the fundamental right guaranteed by Article 25 of the Constitution of Pakistan and such actions are illegal. In paragraph 19 of the judgment the Honourable Court had held:-- "Both in terms of grant of privileges as well as imposition of liabilities, the State is required to treat everybody alike and no rational basis for treating owners of different industrial units differently has been disclosed."
18. In this connection, the learned counsel for the plaintiff further pointed out that Ibrahim Textile Mills Ltd. And Gulshan Spinning Mills Ltd. Were not subjected to penalty on non-repatriation of Foreign Exchange earning of the requisite amount and on this ground also the action of the defendants Nos. 1 and 2 in levying the penalty on plaintiff is illegal and violative of Article 25 of the Constitution of Pakistan and it is liable to be set aside and the amount of penalty imposed and interest charged being total Rs,39,298,709 is liable to be refunded to the plaintiff together with interest at 9 per cent per annum from the date of payment until refund.
19. The learned counsel submitted that the plaintiff in paragraph 12 of the plaint has specifically mentioned that penalty imposed on Kofcot Textile Mills, Gulshan Spinning. Mills, Ibrahim Textile Mills Ltd. And Imran Spinning Mills. Ltd was condoned. It is also mentioned that the plaintiff had made representation/appeal to the defendants. He pointed out to Annexure P/3 filed with plaint, which is a note from Abdul Razzak, Joint Secretary dated 24-7-1996 in support of the plaintiff's contention.
He also relied upon in para. 10 of the written statement filed by the defendant No,2 admitting the contents of para 12 of the plaint, but stated that each and every case has its own merit. No explanation was given in the written statement as to the distinction between the plaintiffs case and the cases of the above four textile mills. Even no evidence was led to this effect by the defendants Nos.1 and 2.
20.
20. Mr. Mansoor-ul-Arfin, has also argued that as far as the 2nd part is concerned, Annexure P/4 to the plaint is addressed to the Finance Division in respect of the representation dated 25-5-1998 of the plaintiff. This note, at the end, recommends for refund of penalty to the plaintiff. This very note (Exh.44) is and has not been denied by the defendants Nos.1 and 2 and has not been subjected to cross-examination. In fact, this document is attested by Mr. Tanveer Hussain, Assistant Economic Advisor, Finance Division, Government of Pakistan. He also contended that in paragraph 10 of the affidavit-in-evidence of the plaintiffs witness, it has been specifically stated that the documents which have been supplied by SBP (Exh.44) which contains the recommendation from SBP to Ministry of finance. This paragraph was not subjected to any cross-examination and, therefore, stands admitted. He concluded that the defendants themselves admitted that the plaintiffs were entitled to the refund of the penalty.
21. On Issue No,6, the learned counsel submitted that the plaintiff states that the defendant No,2 has not imposed penalty as per law in force and Rule 4 framed under the Act is void as stated above. He further submitted that without prejudice, the plaintiff states that the mala fide of the defendants Nos. 1 and 2 is apparent from the fact that it imposed the penalty as per the exchange rate prevalent on 11-4-1996, whereas according to them, the shortfall related to earlier years. The exchange rate must have been different in earlier years. He further submitted that the defendant's witness refused to divulge the exchange rate stating that it may be ascertained from the defendant No,3, the Muslim Commercial Bank Ltd.
22. The learned counsel for the plaintiff further submitted that the defendant No,2 had also charged on the alleged penalty interest at 9 % as admitted by the witness of the defendant No,2. No law has been cited under which the interest is liable to be paid on penalty. Interest could have been charged if permitted in law and provided the demand was made to pay the penalty and such demand was not met. According to the learned counsel, the fact is that the defendant No,2 without any prior notice imposed the penalty and recovered it on 11-4-1996.
23. In reply to the above arguments, the learned Advocate for the defendant No,2, had submitted his written arguments in which he has stated that plaintiff is a Public Limited Company carrying a business manufacturing of cotton yarn exporting/ selling in the local market. Defendant No,1 has announced a scheme known as "Pay As You Earn Scheme Act 1973" for the purposes to facilitate the importers to import machinery/ equipment on credit for establishing of industrial unit in foreign exchange. The Government of Pakistan framed rules under the said scheme. The said scheme was regulated by the defendant No,2 on behalf of the Government of Pakistan vide Notification dated 20-3-1973, the main features of the said scheme are as follows:--
(a) Plant, machinery and equipment can be imported from such suppliers as are willing to accept payment over a period of time out of the export earnings of the products of the industrial unit after it has been installed and begun production
(b) Machinery and equipment can also be imported for balancing modernization, replacement and expansion under the Pay Scheme.
(c) Machinery which can be manufactured locally up to required specifications will not be allowed to be imported.
(d) Import of raw materials for units set up under the Scheme will be governed by normal import policy.
(e) Government may allow advance payment in foreign exchange for purchase of plant and machinery up to 15 % of the C and F value of the machinery provided that sponsors give an undertaking that in case machinery is not imported, they will repatriate the foreign exchange to Pakistan; or pay to Government a penalty amounting to 27 % of the advance payment plus interest on it at 9 per cent.
(f) Projects established under PAYE will be allowed a maximum of 50 per cent of the FOB value of their foreign exchange earnings for meeting their debt liability and other foreign exchange payments on account of royalty, technical fee and incidental charges.
(g) If in any financial year, the debt service liability cannot be met out of the prescribed percentage of earnings, in that year the extent of shortfall will be provided at the official rate of exchange but subject to a penalty amounting to 27 per cent of the shortfall.
24. The plaintiff being the importer had entered into a contract with Messrs C.ITOHE Co.(H.K.)
Limited for importing the textile machinery and opted the terms and conditions of the said circular through defendant No,3. The said contract was duly registered with defendant No,2 through authorized dealer of plaintiff i,e, defendant No,3. As per the contract the total cost of machinery including interest thereon was Rs, 123,556,071. A sum of Rs,9,215,578 being 10 % of the contract amount was paid to the supplier at the time of signing of the contract. An amount of Rs,4,445,900 being 5 % of the contract amount was paid at the time of opening of L.C. The balance 85 % of the contract amount being Rs,109,593 was payable in 12 bi-annual instalments commencing from 16- 4-1990 to 16-10-1995. The case of the plaintiff is that the plaintiff could not achieve the target due to shortfall earning because of the reasons beyond their control law in order situation of the city. The defendant No,2 without any show-cause notice debited the account of the plaintiff through defendant No,3 and penalty @ 27 per cent of the shortfall along with penal interest Q 9% per annum. Thus the plaintiff has filed the above suit and has prayed the following:--
(1) A declaration to the effect that the levy of penalty of amount of Rs,39,298,709 by the defendants 1 and 2 is illegal, unwarranted and without any basis and without any show-cause notice to the plaintiff and the said amount together with mark-up/interest and excise duty Rs,382,536 as calculated by the defendant No,3 is liable to be refunded by the defendants 1 and 2 to the defendant No,3 and that the plaintiff is not liable to pay the same to any defendant.
(2) A declaration to the effect that the rule framed under "Pay-As. You-Earn Scheme Act, 1973" are ultra vires and in excess of delegation and liable to be struck down as such.
(3) An injunction restraining the defendants from declaring and treating the plaintiff as defaulter and restraining the defendant No,3 from demanding and/or recovering' any amount due to wrong penalty or mark-up thereon.
(4) Cost of suit.
(5) Any further/other/additional relief or reliefs which this Honourable Court may deem fit and proper in the circumstances of the case.
25. The defendant No,2 filed the written 'statement and vehemently denied the claim of the plaintiff for refund and further stated that no discrimination has been made by the State Bank of Pakistan.
The penalty was charged as per the terms and conditions/notification. Admittedly the case of the defendant No,2 is that the plaintiff imported the said machinery from Hong Kong and the said loan agreement under the said scheme was registered with defendant No,2 on 27-4-1987 through defendant No,3 as authorized dealer in Japanese Yen. The said facility was to be adjustable in 7 years in 12 half yearly instalments and the rate of interest was 6.5 % per annum vide letter dated 27-4-1987. Under the terms and conditions of the scheme repayment schedule was offered to defendant No,3 to be paid in foreign currency vide letter dated 3rd April, 1991. The plaintiff has failed to achieve the export target as per the said scheme. The plaintiff only achieve the export target for the year 1990-91 as Exh. D-6/A and according to the said scheme was not to be adjustable for the next coming year i,e, July or in June. It is further case of defendant No,2 that under the provisions of the rules governed under the said scheme the amount realized in the foreign currency was accountable for the financial year July to June and excess balance if any was not to be carried over in the next financial years as such the plaintiff committed shortfall/defaults and in exercise of the powers vested under the said Act penalty @ 27 % on the shortfall along with 9% penal interest to be deposited in government account, as such various letters dated 11-4-1996, 15-10-1996, 27-10- 1997 were issued and the said amount debited of the defendant No,3. The details of the year-wise export performance are as follows:-- Year Year-wise export PerformanceYear-wise debtServicingShortfall (calculated as per PAYE Rules)
1989-90 28,270,464 15,672,883 3,075,302 1990-91 93,086,564 24,035,937 Nil 1991-92 17,249,418 25,272,356 33.295,294 1992-93 18,021,524 28,325,573 38,629,622 1993-94 14,284,918 34,744,849 55,204,780 1994-95 1,963,076 38,745,431 75,527,786 1995-96 Nil 17,009,492 34,018,984
26. The defendant No,2 further specifically denied that no discrimination has been done regarding claim of refund.. Although in the case of Neelam Textile Mill the High Court granted some relief to the Neelam Textile Mill which was challenged before the Supreme Court of Pakistan and leave has been granted and the matter was sub judiced. The other cases fall within ambit of said scheme were considered by the defendant No,1 in its own merits and granted some relief, but the case of the plaintiff is distinguishable. Other cases have its own merits and no case is made out to waive the penalty and interest.
27. On the Issues the learned counsel for defendant No,2 submits that evidence of the parties were recorded by the Court. The defendant No,2's witness who has fully supported the case of the defendant No,2 and has produced the documents through an affidavit-in-evidence which are available on record, which admittedly proved that the plaintiff could achieve the target and has committed shortfall in the years 1990, 1992, 1993, 1994, 1995 and 1996, thus the penalty was imposed strictly in accordance with the terms and conditions of the said scheme. In the cross-examination it has come on the record that the authorized dealer was responsible on behalf of the plaintiff for the shortfall as such the plaintiffs case is not proved. The plaintiff has submitted synopsis and has not discussed evidence issue-wise and material facts/documents for the determination of the basic issue. The spirit of the said scheme was that the minimum 50 % of FOB value of annual export earning can be utilized by the industrial for meeting its debt liability and other liabilities for the same financial years. In case of shortfall in realization in repatriation of required foreign exchange a penalty of 27 % of the shortfall along with penal interest @ 9 % per annum on the said amount of penalty from the date of remittance of the debt instalment till the date of recovery of penalty is charged and credited in the Government account. From the statement in paragraph-7 of the plaint also reproduced in the synopsis it reflects the shortfall, therefore, defendant No,2 has rightly calculated the amount of shortfall and penalty/interest strictly in accordance with the said scheme after having issued notice to defendant No,3 rightly debited the accounts of the plaintiff as such there is no question arises that the action was taken by the State Bank of Pakistan without notice and action is unwarranted. The defendant No,2 has produced the notice for debit of account of the defendant No,3 vide letters dated 23-11-1995 (D-8) , 20-12-1995 (D-9), 15-1-1996 (D-10) , 11-4- 1996 (D-11) (Exh. 58), 11-4-1996 (Exh. -59) 25-10-1997 (Exh.-60), 27-10-1997 (Exh. D-14), which clearly proves that the plaintiff has committed defaults.
28. The learned counsel for the defendant No,2 commenting upon the reported case of Neelam Textile Mill has stated that the High Court in its judgment had declared the Rule 4(2-b) of the said Scheme was arbitrarily and the action was declared to be mala fide and granted the relief. Against the said judgment, petition is pending before Supreme Court of Pakistan leave has been granted (D-15/A and Exh.-62 page 611). As regards other cases i,e, Suleman Spinning Mill, Colony Thal Textile Mill and also other cases which are also pending before Supreme Court of Pakistan for adjudication of action taken by State Bank of Pakistan. So far as the other cases namely Kofcot Textile Mill, Gulshan Spinning Mill, Ibrahim Textile Mill and Imran Textile Mill were considered by the Government of Pakistan on the case to case basis and some relief was granted by the Government of Pakistan, i,e, defendant No,1, but the case of the plaintiff is distinguishable and does not cover under the said Scheme, as the plaintiff has committed default or violated the terms and conditions of the said scheme, and has not achieved the target year to year basis and committed shortfall in export earning, therefore, the plaintiffs case do not cover under Article 25 of the Constitution of Pakistan and does not deserve for any relief. The plaintiff has miserably failed to prove their case as such plaintiff is not entitled to any refund.
29. I have heard both the learned Counsel at length perused their written arguments and in fact I have produced their respective written arguments in the preceding paragraphs of this judgment.
My findings in the light of case-law produced by the Advocate for the plaintiff and facts of the case are as under:-- Issue No,1 .
30. I have discussed upon this issue while narrating the facts in the preceding paragraphs at length. The plaintiffs witness in paragraph 8 of the affidavit-in-evidence has given reasons for shortage of the production. The witness was cross-examined by Mr. S. Tariq Ali, Advocate for defendant No,
1. The witness in reply to a question has stated that "it is correct to suggest that the target of earning could not be achieved due to imposition of restrictions of import in Japan.
Voluntarily states that this is not the only reason for shortfall. The reply of the witness was neither controverted nor challenged through other questions. Instead a funny typed suggestion was repeatedly made to the witness asking him that Japan had not imposed restrictions on the plaintiffs mill, to which witness replied that "imposition was general and not for specific mill." All other averments made in the affidavit-in-evidence were not challenged. The law is clear that if on a particular point there is no cross-examination, the point/statement to that effect which has not been contradicted stands proved. In the present case it A is proved that shortfall in the export of goods was not wilful. The issue No,1 is replied in negative.
Issue No,2
31. ' Issue No,2 relates to booking of foreign exchange risk at 3 per cent per annum for the purposes of remitting the instalment. Since the payment was being made by the plaintiff from his own pocket at the rate of 3 % as foreign exchange risk for the purposes of remitting the same to the supplier, as such, by his this act no loss has been caused to the defendants Nos.1 and 2. The issue is replied accordingly.
Issue No,3
32. On this issue plaintiffs witness in his affidavit-in-evidence has stated that regular necessary information was being forwarded by the plaintiff to the defendant No,2 and yet defendant No,2 did not take objection as to the shortfall and did not give any warning to the plaintiff about the shortfall earning of the plaintiff. In para 19 of the affidavit-in-evidence, the plaintiffs witness has stated that it was after remittance of the entire amount of price and interest thereon to the supplier that the plaintiff was informed after 11-4-1996 about the alleged shortage and deduction of penalty and interest thereon. In para 18 of the affidavit-in-evidence, the plaintiffs witness has specifically stated that although the defendants 1 and 2 were in the knowledge of not meeting the target, the defendant No,1 did not take any objection and thereby waived their right to levy any penalty. The assertion of the witness is that had such objection been taken in time, the plaintiff would have tried to purchase the yarn from the market for export to meet the target. This statement was not questioned in cross-examination by either of defendants. However, the effect of the issue is that no notice was served on the plaintiff prior to levy and recovery of penalty and interest thereon as is the requirement of every statute whereon party's rights are affected. The principle of natural justice is that every party who is going to be affected by the Act should be afforded an opportunity to explain.
33. In cross-examination, the witness of the defendant No,2 was asked to inform whether:-- "Did you call the plaintiff to explain the reasons when on post facto checking the State .Bank came to know that there was a shortfall in the target?"
34. The answer of the witness was that since the defendant No,3 was authorized dealer, they call the documents from them. Ultimately, the witness answered:-- "It is correct to suggest that we did not give an opportunity to the plaintiff to meet the target before imposing the penalty."
35. Again the witness in cross-examination admitted:-- I "It is correct to suggest that no notice was given to the plaintiff before charging the interest".
36. The bank's witness Muhammad Taufiq (Exh. 73) in cross-examination to the plaintiffs counsel also admitted:-- 'The SBP or the Government had not sent any notice to MCB calling any explanation for not reaching the target".
37. The admitted position is that no notice was sent to the plaintiff to explain the shortfall and/or to meet the shortfall. As such, the imposition of penalty and interest was unlawful.
Issues Nos.4, 5 and 6
38. These issues are inter-related and I hereby deal with all the three issues together as under:-- 39.
39. The plaintiffs argument is that penalty could not be charged under the Scheme of rules framed thereunder as the imposition and the recovery are against the natural justice as stated above and further there is no assertion from either of the defendants that there was wilful default on the part of the plaintiff. There is no evidence from the side of the defendants that shortfall in export was wilful on the part of the plaintiff. The plaintiff submits that in any event, no penalty could be imposed after taking into consideration all facts and circumstances of this case, which had been explained hereinabove under the heading reasons for shortfall and which had not been denied by the either of the defendants and the same has not been subjected to any cross-examination from the defendant's side. The plaintiff relies on the case of Neelam Textile Mills v. State Bank of Pakistan and others PLD 1999 Karachi 433 to the effect that the expression "liable to pay" occurring in section 4 of Pay-As-You-Earn Scheme Act indicates that the legislature intended to confer a certain amount of discretion upon concerned authorities to levy or not to levy a penalty or levy penalties, in different amounts depending upon gravity of offending act. In this case, the Division Bench of this Honourable Court set aside levy of penalty holding that the same was without proper authority and of no legal effect and the State Bank of Pakistan was directed to refund the amount to the petitioner within three months. Special reliance is placed by the plaintiff on the following observation in para.15 at page 440 of the above judgment which is reproduced as under:-- "It is, therefore evident that framers were conscious of the fact that at times it might not be possible for an importer of machinery to generate sufficient foreign exchange earnings for reason beyond his control, and therefore, ample discretion was conferred upon the Government to provide appropriate relaxation in a fit case. We, therefore, find considerable force in Khawaja Shamsul Islam's contention to the effect that penalty could not be imposed in the absence of a definite finding of wilful default on the part of the petitioner and in any event, it could only be imposed after taking into consideration all the facts and circumstances of a particular case. It would be highly incongruous to assume that while a person obtaining foreign exchange in advance and yet failing to import machinery will escape penalty if he repatriates the mechanically liable to penalty merely because the amount was repatriated after a particular date. We are, therefore, of the view that if rule 4 is construed in the manner suggested by Mr. Rehmani, the same would be liable to be struck down as being repugnant to the parent Act and ultra vires the rule making power."
40. In respect of the above case the defendant No,2 has contended that leave has been granted by the Honourable Supreme Court. However, no stay of recovery was granted. In fact, the amount of penalty has been refunded as per Court's order. Again reliance is placed by the plaintiff on two cases decided by Lahore High Court:--
(i) Suleman Spinning Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 324;
(ii) Colony Thal Textile Mills Ltd. v. Federation of Pakistan reported in PLD 2001 Lahore 518.
41. In the first case, it has been held that the word "shall be liable to pay" under section 4(20(b) of the Pay-As-You-Earn Scheme Act, 1973 calls of a determination by SBP that the establishment has committed some violation of the Act for the reasons in its control and then proceed to decide whether or not any penalty is liable to be paid, if so, at what rate? The Court further held that Rule 4 of Pay-As-You-Earn Scheme is ultra vires the main Act and has therefore no effect. For these reasons, the penalty imposed directly was ordered to be refunded immediately.
42. It was further held that Rule 4 is ultra vires the main Act inasmuch as in section 4(2)(b) of the Act, there was a discretion to levy penalty at any rate not exceeding 27 % but Rule 4 made it mandatory and it took away the power of SBP whether or not to levy any penalty after determining whether violation of the Act was within or beyond the control of the party. Appeal against judgment of this case was dismissed by a Division Bench of the Lahore High Court. In the second case of Colony Thal Textile Mills Ltd. It has been held that penalty cannot be imposed automatically by the Federal Government or the State Bank of Pakistan, but the concerned authority should grant hearing to the person and pass any order under section 4(2) of the Act. In view of above discussion and in the light of case-law, I hold that the defendants Nos.1 and 2 have wrongly charged penalty and rules and laws have been applied D discriminately upon the plaintiff. The Issues Nos.4, 5 and 6 are replied accordingly.
43. It has come in the evidence that the defendants Nos.1 and 2 have even charged interest on the penalty amount, which in any case by itself is illegal inasmuch as interest is in the nature of damages and same could not have been charged on the penalty amount. The plaintiff has claimed interest at the rate of 9 per cent per annum. Section 34 of the Civil Procedure Code provides awarding of interest pendente lite and from date of decree until payment. Plaintiff has been deprived of his lawful money for a very long period and the discretion has to be exercised in their favour. In AIR 1946 Patna 154, the interest was allowed having regard to the fact that the claim for cess, which was being allowed extended over a long period from 1918-19 to 1938-39. The Court held that such interest ought to be allowed during the pendency of the case. There are a number of cases in which the interest has been allowed even though the same has not been claimed in the suit. Reference may be made to the case of Pakistan Railways v. Javed Iqbal (1995 SCMR 446).
Section 34 subsection (2) C.P.C. Stipulates that:-- "(2) Where the Court is of opinion that the recovery of any public dues from the plaintiff was unjustified, the Court may, while disposing of the suit, make an order for payment of interest on the amount recovered at the rate of two per cent above the prevailing bank rate."
' Not only this, the amount recovered illegally by the defendants Nos. 1 and 2 has since been depreciated considerably. All these lead to the conclusion that the plaintiff is also entitled to interest at the rate of 9 per cent per annum from the date of the suit till payment, as claimed in the plaint.
44. Therefore, the suit of the plaintiff is decreed against defendants Nos.1 and 2 for Rs,39,298,709 with interest at 9 per cent per annum from the date of the suit till payment with costs. It is also declared that the Rules framed under Pay-As- F You-Earn Scheme Act, 1973 are also ultra vires and in excess of delegation. The defendants are restrained from declaring and treating the plaintiff as defaulter on account of amount mentioned in this suit and if their names are reported in CIB same should be removed immediately therefrom.