MUHAMMAD JAWED ZAKARIA, (JUDICIAL MEMBER).---By this order, we intend to dispose of above titled appeal filed by the appellant/department against the impugned Order No,17 dated 30.03.2016 passed by the learned Commissioner Inland Revenue (Appeals-IV) Karachi (the CIR(A)).
2. Brief facts of the case are that the Taxpayer/respondent is engaged in manufacturing of various types of chemicals and shoe adhesives which have been mostly supplied to unregistered lather and footwear manufacturers at zero rate or at reduced rate of 6% or 5% by availing benefit of concessionary SROs time to time issued by the Federal Government for five export oriented sectors including lather and footwear. The Directorate of Intelligence and Investigation-IR, Karachi during the course of an investigation conducted against another taxpayer and initiated the action under section 38 of the Act against another taxpayer (not the respondent) during the visit/raid on such taxpayer premises by the officers of I&I. On the same place other three tax payers (registered persons) were also operating from the same premises including the taxpayer/the respondent.
Accordingly, the I&I officers seized the records of the respondent also and found some discrepancies in respondent's records. The case was forwarded to the. Deputy Commissioner Inland Revenue Audit Unit-01, sales tax refund division, Zone-I, RTO-II, Karachi (the DCIT). Pursuant of the contravention report of I&I, the DCIR issued a show-cause notice C.No, DCIR/Aud-1/Zone- I/RTO-II/2014/103 Dated 30-09-2014 for the tax periods from April 2010 to June 2012. The same was properly replied by the respondent. However, the DCIR passed the impugned Order-in:Original No,09/2015 dated 02.02.2015 (0-1-0). The respondent filed an appeal before the learned CIR(A) who passed the impugned appellate order and decided, the appeal in favour of the taxpayer. The department being aggrieved with the impugned order-in-appeal has filed the instant appeal before this Tribunal, on the following grounds: "2- That the learned Commissioner Appeals IV, has not afforded the opportunity of being heard to the department and decided the case unheard which is contrary to norms of justice.
3- The learned Commissioner Appeal IV has erred to held order barred by time by merely 5 days and failed consider that, the competent authority i,e, Commissioner has extended the period of proceedings under section 11(5) proviso of the Sales Tax Act, 1990 vide letter No, 1(1)CIR/Zone- 1/RTO-11/2013/3854 dated 27-01-2015. Moreover the AR of the respondent claimed that they did not received of copy of show-cause notice thus received on 09-10-2014, the receiving of AR can be seen on the copy of show-cause notice.
4- The learned Commissioner Appeal erred in understanding the SRO 509(1)/2007 dated 9th June, 2007 and SRO 283(1)2011 1st April 2011 an subsequent changes vide SRO 1058(1)/2011 dated 23rd November, 2011, SRO 1012(1)/2011 4th November, 2011 and SRO 1125(1)/2011 dated 31-December, 2011.
5- The learned Commissioner Appeal has ignored that, respondent has failed to verify the payments under section 73 of the Sales Tax Act, 1990; and did not discuss that, how payment under section 73 has been made and verified.
6- The, the learned Commissioner Appeal-1V erred in understanding the sections 7, 8 and 10 of the Sales Tax Act, 1990 is bad in law and did not discuss that, how the all input tax adjusted and refunded was as per law.
7- The learned Commissioner Appeal-IV has failed co relates the purchases with supplies in view of section 8 of the Sales Tax Act, 1990."
3. Before us, the DR supported the 04-0 as well as the grounds of appeal and emphasis on correctness of investigation conducted by the Directorate of I&I. The learned D.R. argued that the departmental case is based on the following--- a) During action under section 38 against another taxpayer department was learned that 3 more registered persons were also operation their business from same premises including the respondent. b) Records of respondent also resumed. It has been observed that most of the sales of the responded were made to unregistered persons.
Most of the sales of declared production of item "chemicals" by the respondent were made without entitlement benefit of concessionary SROs at zero percent under cover of SRO 509(1)/2007 and thereafter since 1st April, 2011 at reduced rate of 6% or 5% under SRO 283(1)/2011 dated 1st April, 2011, SRO 1012(1)/2011 dated 4th November, 2011, SRO 1058(1)/ 2011 dated 23rd November, 2011 and SRO 1125(1)/2011 dated 31st December, 2011 during the respective tax periods. d)It has been observed that consumption of chemicals and raw materials were not same in each month, meaning thereby there is no specific formula. Therefore the department is of the view that declared manufacturing and sale of shoe adhesive by the respondent is fake and respondent used it for claiming illegitimate refunds of sales tax. e) Further that the CIR(A) has failed to provide opportunity of hearing to the appellant department and declaring the order-in-original barred by time under section 11(5).
4. On the other hand, learned AR of the Respondent/taxpayer strongly rebutted the contentions of the learned D.R. and supported the order of the learned CIR(A). The AR mostly emphasis on the following: a) That action against the respondent by the I&I and the DCIR was taken with mala fide intention in reaction of the Respondent request before the Federal Tax Ombudsman (FTO) against continues delay in issuing refunds to the respondent.
The action of the I&I of resuming records of the respondent is illegal being without powers and any notice and proceedings against the respondent.
The CIR(A) has provided opportunity of hearing to the appellant which is reflected in the impugned order. d) The 0-1-0 is barred by time under section 11(5) of the Act. e) All departments of Inland Revenue including sales tax department have completed the audit of respondent from time to time upto financial year 2012. Not a single contravention has been detected by above departments of Inland Revenue. Including PHYSICAL VERIFICATION of respondent business premises has been carried out and no violation of registration profile has been deducted in any such exercise. f) Further there is no allegation regarding input claimed from Black Listed, neither Suspended Units nor any charges framed for violation of Section 73 of the Sales Tax Act, 1990 (the Act). Hence all input claims are genuine and all payments to suppliers are made in full compliance of Section 73. g) The application of sub-clause (ii) of clause (c) of SROs 509; 283; 1058 and 1125 on which the show-cause notice is based, cannot be read in isolation, instead it should be read with sub-clause
(iv) of clause (b) of said SROs, hence, referred sub-clause (ii) of clause (c) has no relationship with the business of Appellant. h) That the CIR(A) basically vacated the order-in-original on the basis that the show-cause notice is very vague. The officer is miserably failed to identify any buyer to whom supplies were made at zero rates of tax and which ones were made at 6% or at 5% to which sub-clause (ii) of Clause (c) of SROs 283 and 1058 applied and what was the wrong with the supplies.
Issues and Findings/Opinion of the Court.
5. We have heard both the learned representatives and have also gone through the records of the case, impugned orders passed by the offices below as well as case laws cited at bar. We deem it appropriate to examine the issues involved in this appeal one by one especially legal issues raised by both the parties- Opportunity of Hearing
6. Regarding the D.R stance that CIR(A) has not provided opportunity of hearing, we may observe that CIR(A) in impugned order specifically mentioned at page 2 that: "Call notices were issued both to the department and the appellant. None attended from the department's side. Mr. Muhammad Ali, FCA, AR attended on behalf of the appellant with whom case was discussed in detail."
The department has filed the appeal on the vague ground that the order was passed without affording any opportunity of being heard to the Department. This ground of appeal filed by the department was drafted and Memorandum of appeal signed by the top brass in departmental hierarchy without minutely examining the order of the learned CIR(A) against which the instant appeal has been filed by the department. We disapprove tendency of appeals filed by the department in so careless manner and without proper scrutiny of the case. Furthermore, the notice of hearing was issued to both parties, but no one appeared from the Department or received any extension in time or any written comments on taxpayer's appeal, whereas the office of the DCIR and the CIR(A) are located in same building which shows non interest of the department. Further, before us, the departmental representative also tried to argue on this vague ground of appeal. We also observe that the CIR(A) duly reflected the stance of the department in the appellate order and consider each para of department's stance taken in order-in-original for deciding the appeal vide his order dated 30-03-2016. Therefore, we don't agree with the DR stance and are of the view that the CIR(A) not only provide opportunity of hearing but also discussed stance of the Department on each issue in impugned order.
Order-in-original Bared by Time under section 11(5)
7.The next ground agitated by the D.R. regarding findings of the CIR(A) by holding that the order- in-original was barred by time as prescribed under section 11(5) of the Act. The show cause was issued on 30-09-2014, order thereon had to be passed within 120 days as per mandatory requirement of proviso to section 11(5) of the Act, limitation for passing of order ran out on 27-01- 2015, whereas order-in-original was passed on 2/02/2015 as written by hand by the DCIR on the order-in-original which is barred by 05 days and if taken 30.01.2015 as typed then the order is also barred by one day which is after the statutory time limit provided in the law. So this is a time barred order which is not sustainable in the eyes of law. Section 11(5) also provides that a period of extension in time upto 30 days sought by the taxpayers during the hearings may also be excluded from 120 days period, however, it was found that the taxpayer was not asked for any extension during proceedings. The respective Commissioner Inland Revenue may also authorised to extend such period of 120 days upto another 90 days, for reason to be recorder in writing. The DCIR while passing the time barred order-in-original after laps of 5 days had not stated any word or reason for such delay and also confront the taxpayer with reasons for extension in time sought or allowed by the respective Commissioner Inland Revenue in the order-in-original. Now at this stage D.R. had taken an stance that the respective Commissioner Inland Revenue has extended the period of proceedings under section 11(5) vide letter No, 1(1)CIR/Zone-I/RTO-11/2013/3854 dated 27-01-2015, and therefore order-in-original was not time barred. In this respect we do not find any weight in appellant/department's plea, and letter from Commissioner seems issued afterthought and glaring after the expiry period of 120 days as if the DCIR was aware at the time of passing the order-in-original that the time under section 11(5) had already lapsed, he would have required to mention this position in order-in-original and confront the same to the taxpayer and should also provide the reference of extension letter issued by the Commissioner with reason as required by the provisions of section 11(5). Therefore, we do not accept such extension letter at this belated stage being after thought.
8. There is plethora of the judgments of the apex courts wherein the superior courts have discouraged passing of such type of orders. In a case reported as Pakistan Ordnance Factories
(POF) Wah, Cant. v. Collector of Customs, Sales Tax and Central Excise Adjudication), Islamabad and others 2012 PTD 1016 (H.C.Isl.), the Honorable Islamabad High Court held as under: "Government departments could not be put at Higher pedestal in matter of limitation, rather they would be supposed to act within statutory period. Order was barred by limitation in circumstances."
The above principle was also emphasized by Honorable Supreme Court of Pakistan in a decision of Commissioner of Income Tax v. Mr. Hakim Ali Zardari reported as SBLR 2006 SC 36/A. head notes are produced below for reference purposes: "The question of limitation being a matter of statute and provisions thereof being mandatory, can be raised before any forum---same cannot be waived---even if waived could be taken by the party waiving it, and even by the court itself---because matter of limitation would not be left upon the parties, duty is imposed on court to see that proceeding within limitation or not."
In a reported judgment cited as 2013 PTD (Trib.) 843 International Cigarette Industries (Pvt.) Ltd. v.
ACIR, the Tribunal was pleased to hold as under: "Limitation-Taxpayer contended that the law required that order in original should be passed within 120 days of issuance of show-cause notice or within such extended period as the Commissioner may for the reason to be recorded in writing for further 60 days. As no sufficient reasons had been recorded by the Commissioner for extension of time, while further extension had been granted after the period of 120 days already stood expired to this effect-validity - period of limitation could be extended but permission of extension must be given by the Commissioner by recording sufficient reasons of extension before the expiry of prescribed period of limitation as mentioned in sections 11(5)/36(3) of Sales Tax Act, 1990. No sufficient reasons had been recorded by the competent authority about the extension of time - Show-cause notice and order in original was vacated by the Appellate Tribunal."
In another case law reported as 1992 SCMR 1898 FOP v. Messrs Ibrahim Textile Mills Ltd. the Hon'ble Court held that: "If the law prescribed of time for recovery of money, after its lapse recover is not enforceable through courts."
The Hon'ble Court in the case reported as 2001 SCMR 838 held that: "As the impugned order was passed after the lapse of statutory period has been held to be without any jurisdiction, the remaining issues do not need to be dealt with"
In a recent judgment the Tribunal in the case reported as 2017 PTD (Trib.) 156 the ATIR decided the issue on the basis of time-barred show-cause notice issued under section 11 of the Act, without going into the merits of the case. The Tribunal yet in another case of Messrs Fazal Paper Mills Ltd.
Okara v. CIR RTO Lahore reported as 2014 PTD (Trib.) 448 held as under: "Once limitation had started to run and had come to an end the assessee acquired a vested right of escapement of assessment by lapse of time."
In view of the above ratio settled by the superior courts as well as by this Tribunal we do not find any warrant to interfere in the order of the learned CIR(A) which is maintained and the departmental appeal is dismissed on this ground too.
Benefit of reduced rate under the Notification and other Provisions of the Act.
9. The DR has also raised grounds that the learned CIR(A),while passing the impugned order in favour of the respondent, has failed to understand that the respondent was unable to substantiate his legal position for getting benefit of reduce rate under aforesaid notifications and claiming refunds. In this respect we may observe that the CIR(A) had specifically discussed each of above issue in impugned order, perhaps he was of the view that this is responsibility of the I&I officials and the DCIR that while they were issuing the contravention report, show-cause notice and order-in- original had given reasoning and evidences in support of charges raised against the respondent taxpayer, the CIR(A) was of the view that all of three above documents and officers were failed to provide a single document in favour of charges raised. We reproduce below the observations of the CIR(A) taken in impugned order in this regards, which are self-explanatory. Precisely relevant extract is as under: "A bare reading of above would show that the said SCN is very vague in respect of charges levelled therein. The officer miserably failed to point out as to which supplies were made at zero rate of tax and which ones were made at 6% or at 4% to which sub clause (ii) of clause (c) of SRO 283 and 1058 applied and what was wrong with the supplies (which he should have identified) made by the appellant and how refund claimed there against was illegal?. The officer was legally bound to issue a very clear SCN framing solid charges therein but instead of doing that he simply forwarded contents of an unspecific contravention report to the appellant.
The higher appellate for a in such like situations always disapproved the orders based upon unspecific SCNs. In one of their judgment reported as 2011 PTD (Trib.) 866 it was held that; "Validity of show-cause notice was foundational to the assumption of jurisdiction by the revenue authority to pass the order. Show-cause notice alleged the illegal sanction of refund but patently omitted to specify the mode of error or the act constituting/causing the purported error - assumption of jurisdiction was an act contrary to law and show-cause notice served upon the registered person was patently illegal and without lawful authority and all the orders based there upon were liable to be set aside show-cause notice, all proceedings and orders based there upon were without jurisdiction."
In a recent judgment the learned ATIR held as under; "We find force in the argument of the learned AR of the appellant that the appellant was served with a defective show-cause notice suffering from vagueness. A vague show-cause notice fails to meet the fundamental legal requirements and therefore demand created as a result thereof is not sustainable (2011) 103 TAX 332 (Trib) = 2011 PTD 808. Further, a vague show-cause notice does not stand the test of judicial scrutiny in terms of honorable Supreme Court of Pakistan's judgment (M/s. Caltex Oil Pakistan Ltd v. Collector of Sales Tax and others PTCL 2004 CL 494) wherein it was held that a show-cause notice carrying defectiveness of vagueness may not stand the test of judicial scrutiny."
Further, both the SRO 283(1)12011 and SRO 1058(1)12011 which were applied in appellant's case have three parts i,e, (a), (b) and (c) which deal (a) with textile sector, (b) with leather, sports and surgical goods sector and (c) miscellaneous.
The learned officer though made a reference a clause (ii) of part C of above mentions SROs in his show-cause notice and order but he failed to make a case against the appellant in clear terms by not dislodging the appellant's claim that it made supplies to such unorganized sectors which by virtue of their status of cottage industry were exempted from sales tax. The officer for declaring appellant's claim of refund to be in genuine made reliance on two grounds i,e, 1) there are 04- persons operating from the same premises and 2) The RP not only made illegitimate adjustment of sales tax but also claimed refunds in respect of supplies made by it @6% and 4%. The operating of more than one concern from the same premises is not at all restricted by law. And then officer did not bother of identify such supplies on which refund could not be claimed. So his order is bald order. The tax cannot be charged just by passing a sweeping remark as officer has done in this case. All government functionaries are required to pass reasoned and speaking orders. It is not only requirement of natural justice and fair trial but also of the section 24-A of the General Clauses Act duly endorsed by the honorable Supreme Court of Pakistan in their various judgments like 2013 SCMR 1159 and 2007 SCMR 152.
I am also inclined to agree with the learned AR that appellant was not provided opportunity of hearing which means opportunity of personal hearing within the meaning of following judgment of the honorable Supreme Court of Pakistan operating part thereof is reproduce as under; Meaning and scope__ Hearing (of a case) meant a meaningful, purposeful and effective hearing which enabled a judge to understand legal and factual proposition involved in the matter as opposed to an illusionary and cursory hearing conducted barely as a formality and to bring on record mere compliance of the rule of hearing.... Where effective hearing was not provided, it shall tantamount to non hearing of the party concerned and legal consequences of the non hearing of the parties shall follow."
So non hearing of the appellant means violation of the constitutional guarantees and amounts to taking away of property without due process of law.
Then there is another important aspect of the case i,e, the show cause in the instant case was issued on 30-09-2014, order thereon had to be passed within 120 days or within the time extended period of 90 days by the commissioner as per mandatory requirement of proviso to section 11(5) of the S.T.A. 1990. In this case limitation for passing of order ran out on 29.01.2015 whereas order was passed on 30-01-2015 i,e, one day after the statutory time limit provided in the law. So this is a time barred order which is not sustainable in the eyes of law which is hereby ANNULLED."
We are in full agreement with the above observations of the CIR(A), particularly when the action against the respondent was taken under section 38 of the Act and levelled charges of tax fraud, even though the appellant tax department had already conducted the sales tax audit of the respondent for the same tax periods, the sales tax refunds against same or similar supplies/sale or purchases had been processed or issued to the respondent continuously after due verifications and applying mind by the tax officers and before issuing refund pre-audit was conducted and even post refund audit were also conducted and concluded by the tax officers which establishes the genuineness of the claim of the Respondent/ Taxpayer. In such scenario this must be the heavy responsibility of the I&I officials and the DCIR to take action under section 38 of the Act only after having firm and sufficient information and evidences of tax fraud against the respondent and not merely on the basis of presumption and assumption. The action of the taxing authorities is against the norms of justice and without legal sanction and authority. The department was totally failed in adhering to its own conduct and past practice and treatment afforded to the taxpayer by the department in accepting the refund. At this stage of appeal we are expecting that the CIR(A) ought to ask the respondent to justify its treatment of taking benefits of reduced rates or claiming refunds of input tax on purchases which already checked and verified during the sales tax audit and refund and post refund proceedings by the same departments officers. Therefore, we fully agree with the decision of the CIR(A) that the show-cause notice and order-in-original are vague in nature and not sustainable in eyes of law.
Proceedings under Section 38
10. At this stage this is very relevant to discuss the legitimacy of proceedings initiated by the department under section 38 of the Act against the respondent. We note that the assessment proceeding initiated by the DCIR against the respondent under section 11 of the Act including impugned show-cause notice and order-in-original were totally based on contravention report issued by the I&I dated 08-09-2014 on conclusion of alleged proceeding under section 38 of the Act. The respondent has continuously challenged the legality of alleged action and proceeding under section 38 and mala fide intention of the tax department. For the sake of clarity and reaching at the appropriate conclusion, we deem it appropriate to recapitulate hereunder the facts and circumstances under which proceedings were initiated under section 38 ibid: i) The respondent is involved in manufacturing and supply of various types of "shoe adhesives"/Chemicals that are listed in Table of SRO 1125(1)/2011 dated: 31-12-11, mostly to various unregistered shoe maker cottage industries at concessional sales tax rate of 0%, 5% or 6% or rates applicable under notifications five export oriented sectors issued by Federal Government from time to time. The respondent has regularly been claimed refunds of related input tax paid on imports or local purchases of raw material including chemicals and the tax department has, after due verifications, been allowed refunds to respondent regularly. ii) The respondent has also filed sales tax refund application for the tax periods under the appeal, however, the tax department were not issued to it for a long time. The Respondent, therefore, has filed an application before the Honorable FTO for instructing the appellant tax department to issue pending refunds at earliest. The honorable FTO after, considering the inordinate delay as maladministration through order dated 28-02-2014 and had directed to the appellant tax department to issue pending refunds of appellant related to tax periods under appeals immediately.
However just after the FTO order, directorate of I&I issued a "Red Alert" against the Respondent on 21.03.2014 to stop issuance of refunds to the respondent, and later on claimed that during an action under section 38 against another taxpayer registered on same address as of respondent, have suddenly discovered that the respondent has allegedly involved in tax fraud and I&I has also resumed the records of respondent including computers records, and later on issued a contravention report dated 08-09-2014. The impugned show-cause notice and assessment proceedings under appeal were initiated on the basis of such report and action under section 38 of the Act. iv) It is also important to mention at this point that the factual position is that the sales tax department has already audited the records of the respondent under Section 25 of the Act for the tax periods under appeal i,e, from July 2011 to June 2013 and post refund audit under Rule 36 of the Sales Tax Rules, 2006 for the tax periods from Apr. 2010 to Nov. 2011 were also done. There is no allegation regarding input claimed from black listed, suspended units or any charges framed for violation of Section 73 of the Act during the audits or refund proceedings.
From the above factual and legal position, we observe that the . total proceedings and impugned show-cause notice and order-in-original in this case is based on alleged action under section 38 and contravention report issued by Directorate of I&I on the basis of record of the respondent resumed during such action. Perhaps legal and factual position is that the show-cause notice itself stated that I & I officials allegedly issued notice under section 38 and made a raid against another taxpayer having registered office on same place, so I&I officials had also seized the records of the Respondent. Obviously the I&I officials neither at the time of action/raid and/or seizing respondent's records nor at any later stage upto issuing of contravention report dated 08.09.2014 had any authorization/legal sanction/empowerment from any competent authority as required by section 38 of the Act i,e, the Board or the Commissioner Inland Revenue (or an officer of I & I of same post duly authorized by the Board in this regards by a notification) for having access to business premises of the respondent, further this is also apparent accordingly that the respondent or its records were not required to the I&I officials for any inquiry or investigation in any tax fraud committed by the respondent. For ready reference section 38 is reproduced below-- "38. Authorised-officers to have access to premises, stocks, accounts and records- (1) Any officer authorised in this behalf by the Board or the Commissioner shall have free access to business or manufacturing premises, registered office or any other place where any stocks, business records or documents required under this Act are kept or maintained belonging to any registered person or a person liable for registration or whose business activities are covered under this Act or who may be required fraud committed by him or his agent or any other person; and such officer may, at any time, inspect the goods, stocks, records, data, documents, correspondence, accounts and statements, utility bills, bank statements, information regarding nature and sources of funds or assets with which his business is financed, and any other records or documents, including those which are required under any of the Federal, Provincial or local laws maintained in any form or mode and may take into his custody such records, statements, diskettes, documents or any part thereof, in original or copies thereof in such form as the authorized officer may deem fit against a signed receipt."
Corollary, in the light of the above, we have no doubt that the action taken under section 38 of the Act by the I&I department was without jurisdiction or in excess of jurisdiction, hence illegal and unsustainable under the law. Therefore, the contravention report issued on the basis of such illegal action and whole assessm ent proceedings on the basis of such illegal action including impugned show-cause notice and order-in-original were also illegal and unsustainable in law.
11.Moreover, these are the recognized and admitted factual position that the respondent and other three taxpayers are registered at same registered address and have been doing business from this address since years, they have manufacturing facilities at different places also in records of the tax department. The respondent has been conducting business and involved in supply of shoe adhesive to various unregistered cottage industries manufacturing shoes at zero rate or reduced rate as provided under five export oriented sectors beneficial notifications issued from time to time.
The respondent has' been making imports and also purchasing raw materials from local registered venders.
12.The respondent has been claiming refunds from the appellant tax department since years with similar facts and location of the business. The tax department since years has been continuously issuing refunds to the respondent. The tax department has also been conducting post refund audits of the respondent and declared clear. The Commissioner Inland Revenue has selected case of respondent for sales tax audit under. section 25 of the Act and assigned tax officers for conducting audit and the assessing officer has conducted audit of the respondent from year to year, such audits are concluded with clear reports or with some observations and assessment.
Verification and checking of invoices either taxable or not issued by the taxpayer and purchase invoices i,e, verification of due output tax liability and input tax claimed is a basic mandate of a sales tax audit, including all provisions of the Act and Rules and notifications issued thereunder, particularly when a taxpayer is dealing a special regime, like in the respondent case benefits of notifications issued for five export oriented sectors time to time.
Obviously, various tax officers including the rank of the Commissioner involved in such proceedings, no refund sanction or post refund audit completed without checking and verification of each and every import or local purchase/sale invoice including application and fulfillment of provisions of sections 3, 7, 8, 10 and 73 of the Act and if a taxpayer claiming refunds on the basis of any other provision of law or a beneficial notification, a refund cannot be issued without findings and verification by refund assessing officer that the claimant fulfill the requirements of such provisions of law or notification. In the above background for ascertaining the legality of the proceedings initiated by the I&I against the respondent under Section 38 on the basis of alleged involvement of the respondent in tax fraud by declaring manufacturing and sales of the respondent as fake for claiming illegitimate refunds, we have reviewed the provisions of Sections 25 and 38 of the Act. It is also opined that proviso to subsection (2) of Section 25 of the Act also authorised the Commissioner Inland Revenue that if he has information or sufficient evidence showing that such registered person is involved in a tax fraud or evasion of tax he may authorize an officer of Inland Revenue, not below the rank of Assistant Commissioner, to conduct an inquiry or investigation under section 38 after fulfillment of the requirement of section 38. We think it appropriate to reproduce here section 25 of the Act -- "25. Access to record, documents, etc.---(1) A person who is required to maintain any record or documents under this Act or any other law shall, as and when required by Commissioner, produce record or documents which are in his possession or control or in the possession or control of his agent; and where such record or documents have been kept on electronic data, he shall allow access to the officer of Inland Revenue authorized by the Commissioner and use of any machine on which such data is kept.
(2) The officer of Inland Revenue authorized by the Commissioner, on the basis of the record, obtained under sub section (1), may, once in a year, conduct audit: Provided that in case the Commissioner has information or sufficient evidence showing that such registered person is involved in a tax fraud or evasion of tax, he may authorize an officer of Inland Revenue, not below the rank of Assistant Commissioner, to conduct an inquiry or investigation under section 38:"
13. Section 38 of the Act also authorised the Commissioner for exercising powers to access record under section 38 for initiating an inquiry or investigation against a registered person who have committed tax fraud, same powers were exercised by the I&I in the instant case against the respondent. However, when we have gone through the provisions of sections 25, 38, 2(37) and 11 (3) of the Sales Tax Act, 1990 conjectively and cumulatively, thus, we have come to a conclusion that in cases of tax fraud these provisions are interlinked and in cases where a sales tax audit has already been conducted by the tax department under section 25 or under any other provision of the Act i,e, by way of post refund audit, provisions of section 38 can only be invoked with permission of CIR as envisaged in section 25 of the Sales Tax Act where the Commissioner Inland Revenue in possession of fresh/new sufficient (positive) information and, evidence which was not at all considered while auditing under section 25 and passing order under section 11(2). The fresh/new sufficient information and evidence without any shadow of doubt showing that a registered person is involved in tax fraud or evasion of tax then only after pressing into service of sections 11(3), 38 and 2(37) of Sales Tax Act and may proceed with definitive and sufficient material information with concrete evidence of tax fraud under section 11(3) and Show-cause notice to be issued under section 11(3) read with section 2(37). If there is no fresh/new information of tax fraud/ massive tax evasion in the possession of tax department and the department intends to further proceed with the same material which had already been considered or relied upon while auditing under section 25 and framing assessm ent under section 11(2) ibid. In the case of same previous considered material then only the CIR under section 45(A)(4) of Sales Tax Act, 1990, may initiate suo motu, for the purpose of satisfying himself (CIR) as to the legality or propriety of any order passed by an officer of Inland Revenue subordinate to him and pass such order as the Commissioner may deem fit.
14. Our above view is also strengthened by a recent judgment of the Honorable Lahore High Court in case of lqbal and Sons v. Federation of Pakistan reported as 2017 PTD 590 (H.C.). In this judgment where the taxpayer has made a case that provisions of section 38 are subordinate to section 25 and can only be invoked through exercising the powers given to the Commissioner by proviso to subsection (2) of section 25 of the Act. The Honorable Court however, vividly held that the category of registered persons who may be required for any inquiry or investigation in a tax fraud committed by him as mentioned in Section 38 is a category which is relatable to the provisions of section 25 and provisions of section 38 have a close nexus with the provisions of section 25 and both these provisions are to be read inextricably. Relevant extract from the judgment is reproduced below for ready reference-- "9.... Section 38 gives the authority to any officer authorized either by the board or by the Commissioner to have free access to business or manufacturing premises, registered office or any other place where any stocks, business records or documents required under the Act are kept or maintained. Subsection (1) of section 38 then proceeds to specify the four different kinds of persons in respect of whom the powers of section 38 may be exercised. These are: 1) Any registered person; 2) A person liable for registration; 3) A person whose business activities are covered under this Act; Or 4) A person who may be required in any inquiry or investigation or in tax fraud committed by him or his agent or any other person.
10. It will be seen that there are four categories of persons who may be made subject to the proceedings under section 38. Section 25 of the Act, 1990, however, only relates to a registered person and none else in whose respect an audit may be conducted and proceedings may be initiated for an inquiry and investigation under section 38 upon sufficient evidence.
13. The category of persons who may be required for any inquiry or investigation in a tax fraud committed by him as mentioned in section 38 is a category which is not free from doubt. The case of this category of persons is relatable to the provisions of section 25 of the Act, 1990.As adumbrated, the Commissioner may direct an investigation or inquiry to be held upon sufficient evidence showing that a registered person is involved in tax fraud or evasion of tax. This is the only provision perhaps in the Act, 1990 which relates to the involvement of a registered person in a tax fraud or evasion of tax. Such an opinion can be formed by the Commissioner upon the coming in his hands of any record of documents maintained by a registered person. Upon the formation of such an opinion the Commissioner may direct an inquiry or investigation under section 38 to be held. This is precisely the inquiry and investigation contemplated by section 38 while referring to it as one of the categories of persons in respect of whom a notice under section 38 may be served. Therefore, this is the only instance where the provisions of section 38 have a close nexus with the provisions of section 25 and both these provisions are to be read inextricably."
15. We are, therefore, of the considered opinion that in cases where a sales tax audit under section 25 read with section 11(2) has already been conducted provisions of section 38 can only be invoked where the Commissioner Inland Revenue held sufficient information and evidence [it ought to be based on concrete tangible material of tax fraud under section 2(37)] showing that a registered person is involved in tax fraud or evasion of tax in these cases SCN ought to be issued under section 11(3) read with section 2(37). This is very clear from the show-cause notice and order-in- original that the I&I at the time of initiating proceedings under section 38 had no sufficient information or evidence that the respondent committed any tax fraud. Even after resuming respondent records in custody and conducting complete inquiry and investigation spreading over periods of months, perhaps neither show-cause notice or order-in-original provides any single sufficient evidence regarding violation of provisions the Act which can be considered as tax fraud, as defined under the Act i,e, knowingly, dishonestly or fraudulently and without lawful excuse doing any act or causing to do any act in contravention of duties and obligations imposed under the Act.
The charges raised through show-cause notice or order-in-original are merely based on pure assumptions/presumptions and under the garb of alleged charges with sweeping statements/remarks and without any evidence in support of allegations which is nothing but whims and conjectures. In case of tax fraud it was the prime responsibility of the tax department to provide the documentary evidence regarding non relevancy of the inputs claimed by the respondent with the goods manufactured and supplies as per provision of sections 7 and 8 of Act.
It was also alleged in show-cause notice of fake manufacturing and supplies, and without any single proof levelled the allegations and still after lapse of passing of seven (7) years of tax periods involved no evidence of their claim of fake supplies brought in record. It is well settled dictum of law that source of source and origin of origin/origin and source of transaction cannot be questioned after lapse of considerable time. In cases of tax fraud it is a well decided principle that initial burden of proof always lies on the department's side and not on the accused person, which have never fulfilled by the appellant department in this case, in this regard we have relied on numerous decision of appellate forums citation of some are listed below-- 2015 PTD 2256, 2004 PTD 868, 2013 PTD (Trib.) 2130 and 2014 PTD (Trib.) 558.
Other cases relied upon by the taxpayer:-- 2018 PTD 108 (LHC) CIR v. All Hassan Metal Works, wherein it has been held that "the burden of fraud was upon the department and could not be shifted upon the taxpayer." 2016 PTD (Trib.) 2744 the Tribunal held that "Allegations of Tax fraud under section 2(37) could not be leveled against the taxpayer merely on the basis of conjectures and surmises".
16. In the light of the upshot of supra discussions, we have no hesitation in declaring that the proceedings under section 38 of the Act initiated in this case are illegal and without legal support and fulfilling the requirements of section 38 of the Act and imposing charge of tax fraud C committed under the Act under section 2(37) read with section 11(3) of the Sales Tax Act. A show- cause notice that is issued on a wrong legal presumption is totally unlawful. Superstructure raised on wrong foundation remains defective and whole of it crumbles on identification of the said defect. It is settled law that if the basic order is illegal and void, then any superstructure build thereon is also illegal and liable to fall. The Honorable Lahore High Court in a recent judgment reported as Pepsi Cola International reported as 2017 PTD 636 held that: "14. On the touchstone of the principles laid down above, I hold that the present petitions are maintainable, in that, Pepsi alleges that the proceedings which have been initiated by the impugned show-cause notices are without jurisdiction and that the dispute' between the parties is in respect of fiscal right based on a statutory instrument. The precise contours of the jurisdictional challenge have been brought forth above and this brings the case of Pepsi within the exceptions laid down by the superior courts in the precedents cited above. The challenge on this basis is that the show-cause notices dated 31.8.2012 expressly state that the D. G l&I had given some findings on the basis of which the show-cause notices are being issued. Pepsi submitted that the report of D. G I&I was illegal and without jurisdiction and that the report has no legal sanctity. Since the report is ultra vires, the show-cause notices which are based on that report are also a nullity. This has been pleaded on the adage that if the foundation of any proceedings collapses, the entire superstructure built thereon would also fall."
17.Before parting with this judgment we may observe that in order to attract the provisions of section 2(37) "Tax Fraud", initial burden lies on the department to show that the taxpayer, knowingly, dishonestly or fraudulently and without any lawful excuse had done any act or caused any act to be done or has omitted to take any action or has caused the omission to take any action in contravention of duties or obligations imposed under this Act or Rules. Provision of section 2(37) further depicts that before invoking section 2(37), it is incumbent upon the DCIR/CIR to adhere the mandatory conditions precedent "Knowingly, dishonestly or fraudulently" and these conditions must exist and the registered persons ought to have committed tax fraud without any lawful excuse. In the instant case, the department has not made out any case of tax fraud whereby the burden of tax fraud can be shifted to the registered person. None of these ingredients constituting tax fraud had been shown by the assessing officer in his impugned order and the department had failed to prove that any of the ingredients of the provisions of section 2(37) were involved in the taxpayer's case. Even if the burden is discharged by the department, only then, the burden is shifted on the Registered person to establish that the act was done with a lawful excuse and without any dishonest intention." Therefore, we are of the mindful of the fact that any act which has not been done knowingly, dishonestly or fraudulently does not come within the ambit of tax fraud.
The act of registration and verification of the antecedents of the suppliers and appellant was carried out by the government functionaries, therefore, as per the principles as laid down in the various judgments of the superior courts, "the appellant cannot be condemned and punished for the wrong doings or the acts of the state functionaries".
18. In view of the facts and legal position as well as numerous case Jaws discussed above in detail, the order of the learned CIR (A) does not warrant any interference is hereby maintained.
19. Consequently, the departmental appeal is hereby dismissed being devoid of any merit.