' CH. SHAHID IQBAL DHILLON (JUDICIAL MEMBER).---The titled appeal has been filed at the instance of registered person calling in question impugned Order-in-Appeal No, 222/2015 dated 29-03-2016 of the Commissioner IR of Appeals, Gujranwala.
2. Succinctly, brief facts as reported by DGRRA Lahore vide Audit Observation No, 21/ST dated 04-10- 2013 are that the appellant has failed to get himself registered under section 14 of the Sales Tax Act, 1990 to discharge his sales tax liabilities for the financial years 2009-2010, 2010-2011 and 2011-2012.
The appellant is found liable for sales tax registration under section 14 of the Act in 2010 due to its annual sales turnover exceeded over threshold of five million rupees and electricity bills over seven lac rupees but he has been registered w.e.f, 29-10-2011. Since, the appellant is liable to sales tax on his sales but has failed to pay sales tax for aforesaid period therefore; is called upon to show cause notice vide C. No, 2319 dated 06-06-2015 as to why sales tax worth Rs,3,004,071/- may not be recovered under section 11(1)(2) and section 36(1) of the Act along with default surcharge under section 34(1)(a) and penalties under section 33(5)(7) of the Act in violation of sections 3, 6, 7, 14, 22, 23 and 26 ibid.
3. Upon adjudication, sales tax liability is adjudged under sections 11(2) and 36(1) of the Act against the appellant without providing him with any opportunity of hearing in conjunction with default surcharge under section 34(1) (a) and penalty under section 33(5)(7) ibid is also imposed vide its Order-in-Original No, 03/ST/2015 dated 20-08-2015. Accordingly, the appellant filed the first appeal before the Commissioner IR of Appeals, Gujranwala who again adversely disposed it off vide Order-in-Appeal No, 222/2015 dated 29-03-2016 hence, the second appeal before this Tribunal.
4. Commencing his arguments during hearing on 16-06-2016, learned counsel has termed the initiation of impugned proceedings as time barred by arguing that no allegation of tax fraud etc., which is covered under section 36(1) of the Act, for which period of limitation of five (5) years is prescribed under the law has been leveled in impugned show cause notice. Neither any provisions of tax fraud as defined under section 2(37) of the Act are invoked in impugned show cause notice nor any penalties for commission of tax fraud are imposed in impugned adjudication order and being a case of Non-filing of return or nonpayment, of sales tax is covered under section 36(2) for which three (3) years time limitation is provided. Impugned show cause notice dated 06-06-2015 for recovery of sales tax not being a case of tax fraud is time-barred under section 36(2) of the Act being beyond statutory time limitation of three years as no order under section 11(5) of the Act can be made by an Officer of Inland Revenue, after expiry of five years in cases of tax fraud and no liability of sales tax in other case involving nonpayment of sales tax, etc can be adjudged unless a notice to show cause to the person in default is given within three years of the relevant date.
5. Besides, learned counsel of appellant has vehemently assailed that the instant case is made out merely on the basis of sales declared in income tax return for financial 'years from 1st July, 2009 to 30th June, 2012. The records i.e, "Income Tax Return" causing to create huge sales tax liability is neither specified as sales tax records under section 22 nor any other provisions of the Act therefore; income tax returns cannot be made basis for creating sales tax liability against any person without any other corroborating material evidence for clandestine removal of goods or receipts of money consideration in its respect.
6. He has placed his reliance on judgment of Hon'ble Appellate Tribunal Inland Revenue, Lahore in case of Messrs Peacock Restaurant (South) Kalar Kahar, Chakwal v. Commissioner, Inland Revenue (Appeals-III) Large Taxpayer Unit, Islamabad reported at [2011 PTD 2861] wherein relevant extract is given as under:-- 'Assessment of sales tax on the basis of income tax return alone without hearing the taxpayer in absence of correct determination of the amount of taxable and non-taxable supplies in the gross sales declared in income tax returns it was very difficult to quantify correct amount of "taxable supply" within the meaning of section 2(41) of the Sales Tax Act, 1990 subject to chargeability of sales tax under section 3 of the Sales Tax Act, 1990.1"
7. Learned counsel said that in view of above, it is settled law that records relating to income tax cannot be made basis for creating sales tax liability against any registered person without any other corroborating material evidences for clandestine removal of goods or receipt of money consideration to constitute a taxable supply under the provisions of section 3 of the Act which is the charging section, sales tax is to be charged, levied and paid on taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him. Supply of goods is a condition precedent for creating sales tax liability against the taxpayer and without establishing the same and linking nexus of figures shown in financial statement of a taxpayer with that of physical delivery of goods and receipt of money consideration; no tax authority can be allowed to create liability of sales tax against taxpayer and if so; it would amount to built a castle in the air as there is no room for any intendment and there is no presumption as to tax. In this regard, he placed reliance on Hon'ble Sindh High Court in case of "Messrs Al-Hilal Motors Stores and others v. The Collector, Sales Tax and Central Excise (East) Karachi and others" reported as 2004 PTD 868 and on judgment of Hon'ble Appellate Tribunal Inland Revenue, Lahore Bench in case of "Messrs Siddique Enterprises, Faisalabad v. C.I.R. (Appeals), R.T.O., Faisalabad and others" reported as [2013 PTD (Trib.) 2130].
8. Learned counsel further argued on factual grounds as well that no prior notice as required to be served under sub-rule (1) of Rule 6 of the Sales Tax Rules, 2006 issued vide Notification No, S.R.O.
555(1)/2006 dated 05-06-2006 and no opportunity of hearing for compulsory registration as required under its sub-rule (2) is given to the appellant and even no order to the effect of compulsory registration catered there under, has ever been served upon him as Inland Revenue has unilaterally registered the appellant and no user ID/Password granted to him for filing of sales tax return.
9. On the other hand, when departmental representative confronted with tax situation cited supra, he has assailed the case on similar grounds and charges as leveled earlier in impugned show cause notice and consequent orders and nothing newel, except to reiterate earlier set of contentions, has been put forused. So far as the issue regarding time limitation for initiation of the case proceedings is concerned, our observation is that according to the provisions of section 36(1) of the Act, the case must be a carth by him.
10. Argument heard and relevant record as well as law carefully pese of tax fraud with the intention of defrauding Government Revenue knowingly, dishonestly and fraudulently manner conversely, the case at instance involving sales tax liability for July-2009 to June-2012 demanded after expiry of three years is prima facie time-barred as without establishing mens rea of tax fraud, it squarely falls under section 36(2) of the Act, whereas impugned show cause notice dated 06-06-2015 has deliberately been issued under section 36(1) ibid in order to drag it towards limitation of five years.
This is not a case of 'tax fraud' as neither provisions of tax fraud are expressly invoked nor contents of impugned show cause notice and contingent order can impliedly envisage any element of tax fraud. As such, the act of registered person has not been charged with the allegation of tax fraud in impugned show cause notice is suffice hardly to establish any tax fraud against him much in absence of imposition of any penalty of tax fraud in terms of sections 33(11) and 33(13) of the Act therefore; a show cause notice, for any amount of tax, non-levied or short-levied due to any inadvertence, error or misconstruction of a registered person, is required to be issued within three- years of relevant date under section 36(2) of the Act.
11. For elucidation and illumination, the provisions of sections 36(1) and 36(2) of the Act are reproduced as under:-- "(1) Where by reason of some collusion or a deliberate act any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within five years of the relevant date, requiring him to show cause for payment of the amount specified in the notice.
(2) Where, by reason of any inadvertence error or misconstruction, any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within three years of the relevant date, requiring him to show cause for paym ent of the amount specified in the notice"
12. From plain reading of above provisions, it is established that impugned show cause notice issued beyond that very time of limitation in flagrant disregard of law in as much as recovery of sales tax, not-levied beyond three years is not only barred by time limitation but is also ex-facie violation of section 36(2) of the Act as laid down by Hon'ble Lahore High Court, Lahore in the case of Messrs Xen Shahpur Division v. Collector Sales Tax (Appeals) Collectorate of Customs, Federal Excise and Sales Tax, Faisalabad and 2 others reported as [2008 PTD 1973] wherein, it has been held as under:- "Notice for recovery of tax not levied or short levied or amount erroneously refunded---Limitation- --Provision of section 36(2) of the Sales Tax Act, 1990 provided jurisdiction for issuance of a notice only for three years prior to the date of such issuance, going beyond said mandatory limit amount defeating the intention of legislature which could not be allowed".
13. Despite above, learned counsel has also strongly challenged that since, impugned assessment order had been passed ex-parte without affording appellant for any hearing therefore; the act of Inland Revenue Officer is illegal and not sustainable in the eye of law particularly when the prior action of compulsory registration is also proceeded ex-parte in defiance of notified provisions of the Sales Tax Rules, 2006. He has further contended that Inland Revenue Officer has failed to issue notice for compulsory registration to adhere due processes for compulsory registration as notified in the Sales Tax Rules, 2006. Since, the act of compulsory registration not well done, without issuing prior notice and without serving contingent order of compulsory registration on the appellant is found illegal and unlawful as proceeded ex parte without adhering due process of law therefore; the appellant could not collect sales tax on its sales made during the period in question. It is also found reasonably sound that since the appellant is registered compulsorily in sales tax without any intimation to him then how, it is possible to collect and to deposit sales tax in Government Exchequer particularly when he is prior operating in a "Cottage Industry" as defined under section 2(5AB) of the Act making exempt supplies in terms of Serial No, 3 of the Table-2 of the Sixth Schedule appended to the Act. To strengthen his view point, learned counsel has furnished certain judgments of this ATIR, bearing S.T.A. No, 745/LB/2015 dated 05-10-2015, S.T.A. No, 753/LB/2015 dated 01-10-2015 and S.T.A. No, 1417/LB/2014 dated 04-05-2015. We have found ourselves quite in consonance with stance taken by learned counsel of appellant as already upheld well by this Tribunal in various judgments propounded on the issue at hand as recently by its Peshawar Bench on 27.07.2015 in S.T.A. No,92/PB/2013 of M/s. Masood & Co. Peshawar, on a difference of opinion, the Referee Member by endorsing the above view point has held as under:-- "As regards question (3), the combined reading of sections 2(25) and 23 of the Sales Tax Act, 1990 and Rule 6 of the Sales Tax Rules, 2006, where a person is required to be registered under the Sales Tax Act, 1990 as envisaged under section 14 of the Act is under. Obligation to apply for registration and in case of failure, the departmental authorities shall issue a notice to such person and after allowing him an opportunity of being heard shall pass an order whether or not such person is liable to be registered compulsorily or not. Hence, answer to question 3 is in affirmative that where a person is liable to be registered the departmental authorities are required to be registered compulsorily and then charge sales tax from him under section 3(1)(a) of the Sales Tax Act, 1990 which stipulates that "there shall be charged, levied and paid a tax known as sales tax at the rate of seventeen percent of the value of taxable supplies made by a registered person in the course or furtherance of any taxable activity carried on by him. "
' (The underlined words seem to a grammatical error. Actually what is intended in the registration of taxpayer?)
14. The sole basis of the action by both authorities below is the sales declared by registered person in income tax returns filed for the years under consideration, which is not sustainable. The appellant in the case at hand has been charged to sales tax without his registration under the Act, by Inland Revenue Officer, which is illegal in the light of section 3 of the Act and rules applicable thereto as well as reported judgment cited as 2013 PTD (Trib.) 2130, according to which data of income tax return can be used to determine correctness of data provided by registered person in sales tax return, but same cannot be used for calculating sales tax liability against him and only a registered person can be charged to sales tax under law.
15. In view of what has been discussed hereinabove, particularly in the light of law and the principles laid by the superior courts in various pronouncements quoted supra for which we have a great veneration and reverence all the times to come, impugned show cause notice as well as consequent orders of both authorities below are declared to be illegal, ab initio void and are hereby vacated.
16. The instant appeal filed by the taxpayer is succeeded and disposed of in the manners as indicated above.