Through these seven appeals, filed by the appellant/ taxpayer, has assailed the impugned Order- in-Appeal No. 431/2012 to 437/2012 all dated 01-10-2012 wherein the CIR(A), Faisalabad rejected the appeals by upholding the orders passed by the learned AOR, Faisalabad.
2. Briefly stated, facts giving rise to the instant appeals are that during post refund audit of the appellant's refund files for the months June-2010, July-2010, October-2010, December-2010, March, 2011, November, 2011 and February, 2012, it was observed that a huge refund of sales tax has been received against packing materials which were neither consumed in zero-rated supplies nor has been shown in closing stocks of that very tax periods. Accordingly, show cause notices dated 20- 07-2012 for recovery of already refunded amount of sales tax worth Rs. 406,717/-, Rs. 281,492/-, Rs.
589,135/-, Rs. 545,474/-, Rs. 916,038/-, Rs. 4,789,443/- and Rs. 234,903/- were issued by the learned ACIR (PRA, Audit-04, Zone-II) Faisalabad. In this way, appellant was also charged with violations of sections 2(14), 2(37), 4, 7, 8, 10, 11(2), 23 and 26 that as to why refunded amount of sales tax may not be recovered under section 36(1) of the Act alongwith default surcharge and penalty under section 34 and 33(11) ibid. Upon culmination of adjudication proceedings, the ACIR being, dissatisfied with the explanation given by the appellant, passed adjudication order Nos. 46/2012 to 52/2012 dated 30-07-2012 directing the appellant to pay the sales tax alongwith penalty and default surcharge as imposed therein.
3. Being aggrieved and disagreed with the treatment meted out at adjudication stage, the appellant filed the appeals before the learned CIR(A), Faisalabad, who also dismissed the same by upholding the orders of learned ACIR and now the appellant has come up in the second appeals before this Tribunal praying for setting aside the impugned orders.
4. The learned counsel on behalf of appellant has vehemently argued that the impugned post audit exercise conducted by the DCIR under section 25 of the Act without prior selection by the FBR under section 72B of the Act is illegal and without jurisdiction. In this regard, he placed reliance on the judgment of the honorable High Court, Lahore which was reported as (PTCL 2013 CL. 1). It was also forcefully urged on behalf of the appellant that the impugned notice issued by the DCIR for requisition of sales tax record for post refund audit under section 25(1) of the Act is illegal and without lawful jurisdiction. The learned counsel further emphatically contented that the impugned audit exercise carried out by the learned DCIR without 'proper and due authorisation' of the Commissioner IR under section 25(2) of the Act is also illegal and without lawful jurisdiction.
Summing up the legal issues raised by the counsel, jurisdiction and legality of the impugned audit exercise was assailed. At the end, learned counsel while continuing his submissions on merits further contented that the impugned orders were erroneous in law and the same are based on misconceived facts as appellant claimed and received refund of input tax incurred on purchases of packing materials as per provisions of section 10 of the Act and there is no provision in the Act which put restriction that the refund should be sanctioned on the basis of its consumption instead of its purchase or import particularly in the instant case, where both exports and local sales of final product was subject to sales tax at the rate of zero-percent and he also placed reliance on the judgment of honourable High Court Lahore reported as (GST 2003 CL 598) and judgment of this Tribunal rendered vide S.T.A? No. 297/LB/2012 dated 06-08-2012. Conversely, the learned DR has although opposed the contentions of the appellant and supported the orders of the authorities below but could not prove his case through any documentary evidences and was not able to produce even a single judgment in favour of the department and could urge nothing to controvert the contentions raised on behalf of the appellant.
5. The arguments of the learned representatives of both the rival parties have been heard and the orders of the authorities below as well as the case law cited by the learned AR of the taxpayer have also been perused.
6. We readily agree with the contention of the appellant that it was a mandatory condition under section 72B of the Act that before conducting an audit of appellant's tax affairs, selection must be made by the FBR. In the instant case, the learned DCIR (Zone- II), has conducted audit of appellant's sales tax records under section 25 of the Act on its on. Will without any prior selection from the Board on the basis of random or parametric criteria under section 72B of the Act which is illegal and without jurisdiction and it is well-settled law that where the basic statutory notice is illegal and without lawful authority, the whole superstructure built on it would have to fall on the ground automatically and whatsoever proceedings in its consequences in the shape of any show cause notice or Adjudication order or appellate order or even recovery notice shall also become illegal, unlawful and without jurisdiction. There is no provision in the Sales Tax Act, 1990 for undertaking any such reconciliation outside the ambit of 'audit proceedings' under section 25 of the Act. For reference, relevant provisions of section 72B of the Act are reproduced herein below: - "72B. Selection for Audit by the Board~{ 1). The Board may select persons or classes of persons for audit of tax affairs through computer ballot which may be random or parametric as the Board may deem fit.
1. Audit of tax affairs of person selected under subsection (1) shall be conducted as per procedure given in section 25 and all the provisions of this Act shall apply accordingly.
2. For removal of doubt it is hereby declared that the Board shall be deemed always to have had the power to select any persons or classes of persons for audit of tax affairs under this section."
By bare reading of above provisions of law, It becomes vivid that the provisions regarding selection of audit by the FBR were made mandatory w.e.f lst July, 2010 therefore, any audit exercise conducted thereafter, without adhering to due process of law by subordinate tax functionaries without selection of audit by the Board is not only illegal and unlawful but also without lawful competency and legal jurisdiction. Any exercise for audit of tax affairs of a registered person under section 25 of the Act without adhering to due process of section 72B of the Act would tantamount to dive violation and flagrant deviation from the doctrine of "Due process of Law". Hence, impugned action without selection of appellant's case for audit is wholly illegal, without jurisdiction and also utter violation of mandatory provisions of law; as the tax functionaries assigned themselves with a jurisdiction not vested in them in the sacred statute book and if it desires to cross the same it would amount to transgress their legal jurisdiction and would equivalent to abuse their powers. It is well-settled principle of law that any exercise conducted without due process of law is illegal, unlawful and without jurisdiction. It is also a well-settled and established principle of law that when the Legislature requires the doing of a thing in a particular manner then it is to be done in that manner and all other manners or modes of doing or performing that thing are barred as also laid down by the Apex Court of Pakistan in case of "Director, Directorate- General of Intelligence and Investigation and others vs. M/s. Al- Faiz Industries (Pvt.) Ltd. " reported as (PTCL 2008 CL 337).
The asserted contention mentioned supra has duly been endorsed by the honourable Lahore High Court, Lahore in case of "Messrs Chenone Stores Ltd. Vs. Federal Board of Revenue and 2 others " reported as (PTCL 2013 CL. 1) wherein similar situation and identical circumstances, the honourable Court has declared all such cases of audit illegal and unconstitutional and without jurisdiction carried out without proper approval and selection by the Board. The ratio decidendi by the Court is reproduced hereunder for reference:- "The constitutionality of section 25(1) of STA can be saved if it is read down, as discussed above, and read in tandem with section 72B of the STA. Hence, section 23(1) provides die machinery provision for conducting of audit of the tax affairs of a taxpayer, after it has been selected for audit by the FBR under section 72B.
It is clarified that rest of section 25, including subsection (1) remain intact and is not dependent on section 72B. Impugned Notice dated 14-12-2011 issued under section 25 of the STA by the Commissioner Inland Revenue (Zone-II) is therefore declared to be unconstitutional and illegal and hence set aside. As a conclusion, for the above reasons, Sections 177(1) of the Ordinance, Section 46(1) of FEA and Section 25(2) of STA are read down and shall provide the machinery provision to conduct audit after the taxpayer is selected for audit of its tax affairs by the FBR through computer ballot which may be random or parametric.
55. For the above reasons, the impugned notices issued bv the Commissioner under sections 177.
25 and 46 of the Income Tax Ordinance. 2001. Sales Tax Act. 1990 and Federal Excise Act. 2005 purportedly calling for the record of the petitioners but infact selecting the petitioners for audit of their tax affairs are declared unconstitutional, illegal and without lawful authority and therefore, set aside."
7. The next legal issue is that the impugned notice issued by the DCIR for demanding sales tax record for post refund audit under section 25(1) of the Act is illegal and without lawful jurisdiction as it was the Commissioner who can issue such kind of notice for requisitioning sales tax records under section 25(1) of the Act for the purposes of post refund, audit. The provisions of section 25(1) of the Act are very clear which provides that; "A person who is required to maintain any record or documents under this Act or any other law shall, as and when required Commissioner, produce record or documents----- In the instant case, the learned DCIR requisitioned sales tax records for audit by vesting himself the powers of Commissioner not otherwise bestowing on him under the provisions of section 25(1) of the Act. The learned DCIR has transgressed his powers by issuing impugned notices for requisitioning the sales tax records under section 25(1) of the Act is patently illegal and void ab initio as it is the Commissioner IR who was legally competent to issue such notices requiring a taxpayer to produce any sales tax record for the purpose of audit. It is a well- settled principle of law that the power vested in any authority can only be exercised by that authority, in default whereof, the entire action would be without jurisdiction, void ab initio and of no legal effect and any subsequent action in continuation of these proceedings in adjudication or appeal shall also equally suffer from illegality and would be without jurisdiction.
8. The last but not the least legal issue which came up for our consideration is that learned DCIR has transgressed his powers by issuing impugned notices dated 08-08-2011, 11-08-2011 and 20-09- 2011 for requisitioning the sales tax records under section 25(1) of the Act without any proper and due authorization by the Commissioner IR. The provisions of section 25(2) of the Act has clearly revealed that; "The Officer of Inland Revenue authorized bv the Commissioner, on the basis of record, obtained under subsection fl), may, once in a year, conduct audit." No doubt that the learned DCIR can conduct audit of sales tax record of a taxpayer but after due process of authorization by the competent authority and in the absence of any such authorization Commissioner under section 25(2) of the Act the whole exercise carried out by the learned DCIR stands illegal, ab initio void and without jurisdiction. Each authority working under the hierarchy of the Inland Revenue Department has been assigned a specific job to perform his duty and to exercise jurisdiction within the parameters as specifically provided under the law. any transgression to his authority and powers vested in the sacred statute book would render the entire exercise of authority illegal and void ab initio. It is crystal clear that the Deputy Commissioner has transgressed his jurisdiction by conducting impugned audit exercise without prior approval and authoritarian of the Commissioner IR under section 25(2) of the Act.
9. The learned counsel arguing on merits assailed that sales tax refund is payable on the basis of goods purchased or imported during a tax period therefore, question of its consumption in the same tax period is practically implausible and unreasonable. The instant issue is basically misinterpreted and misconstructed by the learned AOR and is framed in defiance of general scheme of input tax adjustment, credit or refund thereof under section 7(1) of the Act and section 10(1) read with the refund rules made thereunder. Allowance of adjustment of input tax under section 7(1) or if its refund accrued due to zero-rated local supplies or exports under section 10(1) ibid is made subject to consumption of input goods in that very tax period is equivalent to deface mid defeat the general scheme of sales tax embodied in the Sales Tax Act, 1990. A registered person is entitled to deduct input tax paid or payable during a tax period for the purpose of taxable supplies made or to be made by him from output tax under section 7(1) of the Act and in case, input tax credit exceeds output tax due to zero-rated local supplies or exports thereof, its refind is made available under section 10(1) ibid. None of the provisions of section 7(1) of the Act or section 10(1) ibid or even the rules made thereunder provides for input tax credit/refund on the basis of consumption instead it is on basis of purchases and imports. In case input tax incurred on purchases or imports exceeds output tax due to zero-rated local supplies or exports thereof, excess amount shall be refunded to registered person under section 10(1) of the Act. It is now well- settled law that the taxing statutes should be strictly construed and where there are more than one possible interpretation to the provision of fiscal statute, the interpretation which is most favourable to the taxpayer shall be preferred to be given effect to. For ease of reference, provisions of section 7(1) of the Act and section 10 ibid are reproduced hereunder: "Section 7: Determination of tax liability.-(1). Subject to the provisions of section 8B, for the purpose of determining his tax liability in respect of taxable supplies made during a tax period, a registered person shall, subject to the provisions of section 73, be entitled to deduct input tax paid or payable during the tax period for the purpose of taxable supplies made, or to be made, bv him from the output tax that is due from him in respect of that tax period and to make such other adjustments as are specified in Section 9: Provided that where a registered person did not deduct input tax within the Relevant period, he may claim such tax in the return for any of the six succeeding tax periods.
Section 10: Refund of input tax.-(1). If the input tax paid bv a registered person on taxable purchases made during a tax period exceeds the output tax on account of zero rated local supplies or export made during that tax period, the excess amount of input tax shall be refunded to the registered person not later than forty-five days of filing of refund claim in such manner and subject to such conditions as the Board may, by notification in the official Gazette specify:"
10. This proposition of sales tax adjustment or as the case may be its refund, has already been settled by the honourable Lahore High Court, Lahore in case of "Collector of Sales Tax, Lahore vs. M/s. Breeze Industries, Lahore" reported as (GST 2003 CL 598) wherein it whs laid down as under:- "The provisions of section 7 of the Sales Tax Act, 1990 are cleared in their tone and tanner that an assessee/registered person is entitled to deduct input tax paid during the tax period for the purpose of taxable supplies made or to be made by him from the output tax which is due from him in respect of that tax period. In other words, the consumption of raw material on which input tax was paid is not directly relatable to the claim of input tax which can be claimed both in respect of the taxable supplies made during that tax period or to be made. For the purpose of adjustment of input tax, it is only the tax period and not the consumption of raw material which is relevant. The intention of law is otherwise clear from the following provisions of section 10 existing at the relevant time and even those as exist today that excess amount can both be carried forward as well as be refunded. In case, the interpretation of the department is accepted then the provisions of section 10 both substituted as well as those presently existing would become redundant. That can hardly be the intention of the law. Therefore, as remarked earlier, we find no justifiable reason to interfere with the impugned order of the Tribunal."
11. This issue has also been resolved in favour of taxpayer by the Division Bench of this Appellate Tribunal Inland Revenue in case of "M/s. Magna Textile Industries, Faisalabad vs. CIR(A), Faisalabad vide S.T.A. No. 297/LB/2012 dated 06-08-2012". The ratio settled in the said judgments are reproduced as under:- "We have gone through the case record and heard the rival arguments and reached to the conclusion that both section 7 and section 10 of the Sales Tax Act, 1990 allow input tax adjustment/refund simply on the payment of input tax. There is no condition of consumption of the goods before taking input tax adjustment or availing refund. The Rule 33 of the Sales Tax Rules, 2006 referred to by the learned DR has to be read and interpreted in harmony with the provisions of section 7 and section 10 of the Sales Tax Act, 1990."
12. In view of above discussions, we reached at the irresistible conclusion that the impugned post refund audit exercise has been carried out by the learned DCIR not only without prior selection by the Board under section 72B of the Act but also without lawful notice for requisition of sales tax record under section 25(1) of the Act and proper authorization of Commissioner for audit under section 25(2) ibid therefore whole audit exercise is illegal, unlawful and without legal jurisdiction and the consequent impugned show cause notice and adjudication and appellate orders also stands illegal, ab initio void and without jurisdiction are hereby set aside. The instant appeals filed by the taxpayer/appellant are accepted to the extent and in the manners as dilated supra.