SHAHID MASOOD MANZAR (CHAIRMA N).---- Titled appeal has been preferred by the registered person assailing the, impugned Order No. 07 dated 30.08.2018, passed by the learned CIR(A), Lahore.
2. Briefly stated, the relevant facts for disposal of the instant appeal are that unde r the auspices of Directorate of intelligence of I&I-IR, a' raid was conducted against the appellant, so as to sabotage the alleged tax evasion by the registered person, culminating in the proceedings under section 38 read with section 25(2) of the Sales. Tax Act, 1990 and the same was followed by taking the possession of series of record. In consequence of the same, registered person was allegedly compelled to deposit a tax demand created during the course of said raid / investigation. The said demand allegedly in response to audit report which according to appellant was not even finalized and without recourse to issuance of show-cause notice under section 11 of Sales Tax Act, 1990 and the alleged tax amount was recovered. After the deposit of tax demand during the course of raid / investigation, an investigation Report No.21/2015 was issued. After the lapse of almost two years from the deposit of sales tax demand allegedly recovered during the course of investigation / raid, the assessing authority issued show-cause notice dated 13.03.2017, and confronted that the registered person has violated the various provisions of the Act read with Special Procedure (Withholding) Rules; 2007, and it was called upon to show-cause as to why un- adjusted principal sales tax amount on account of short payment of sales tax / evasion of sales tax / non-payment of further tax should not be adjusted, against the liability as mentioned in investigation audit report under section 11(3) along with default surcharge and penalty . The said belated show-caus e notice was culminated into assessment order dated 17.03.2017 through which case was termed as disposed of on the basis of alleged recovery of sales tax during the course of raid / investigation.
3. Being aggrieved, the registered person assailed the order of the assessing authority before the learned CIR(A) on a number of legal and factual grounds. Main thrust of the appellant before the learned CIR(A) was that the sales tax demand was recovered under coercio n without due process of law as envisaged under the law. However , the learned CIR(A) termed the appeal filed by the taxpayer being infructuous for the reason that the evasion of tax duly admitted by the taxpayer during the course of raid / investigation and due payment of sales tax and default surcharge / penalty has already been deposited. The appellant being not satisfied with the impugned order of the learned CIR(A) has filed instant second appeal.
4. At the very outset of his arguments, the learned AR for the appellant contended that very disposal of present appeal by the learned CIR(A) by terming the same as infructuous is unjustified, illegal and against the norms of justice. He submitted that learned CIR(A) has given no judgment on basic legal as well as factual issued raised through grounds of appeal and through oral arguments and decided the appeal by simply relying upon the opinion of investigation agency which rendered whole exercise of adjudication illegal and of no legal effect at all. The appellant has vehemently contented that it is a complete case of abuse of discretion by the respondents as there was no instance of issuance of show-cause notice under section 11 of Sales Tax Act, 1990 and compelled recovery was affected even before the finalization of the audit report along with the penalty and default surcharge without confronting anything to the appellant on violation of the parameters maintained by both Sales Tax Act, 1990 and the principles held aloft by the superior fora of the country .
It is argued that the registered person has neither admitted any evasion of liabili ty of sales tax whereas alleged amount was coercively recovered by the department during the course of investigation / raid and even prior to issuance of Investigation Audit report which cannot be equated with admission and confession of charges and allegations levelled against him. The alleged amount was deposited apparently to avoid criminal prosecution and suspension of his registration / arrest. The learned AR further submitted that neither any show-cause notice for assessment of sales tax or as the case may be recovery of short levied or non-le vied of sales tax under sections 11(2) and 11(3) of the Act has been issued nor any order determining liability of sales tax has been passed prior to recovery of sales tax from the registered person and whole exercise for recovery of sales tax has been carried out without adhering to due process of adjudication as provided under law. The learned AR contended that the assessment order was passed without due process of law and sales tax liability was created and even recovered by force on the basis of self-derived figures and self concocted formula in a mechanical fashion for which there is no room in the fiscal statutes.
5. On the other side, the learned DR supported the impugned orders of the officers below and contended that issuance of show-cause notice under section 11 of Sales Tax Act, 1990 is not necessary for tax recovery nor is confronting the audit report under some circumstances. He has requested to uphold the impugned orders of the officers below .
6. We have heard the arguments of both sides and have perused the impugned orders, the case law referred and the available record. We are of the view that the sales tax is premised on a self-assessment paradigm, where the sales tax due is self-assessed by a taxpayer and deposited along with the monthly sales tax return. Supervision and monitoring of the self-assessment regime is through the process of audit provided under sections 25, 38 and 72B of the Sales Tax Act, 1990. Once the taxpayer is selected through audit and the department is of the view that the taxpayer has an outstanding tax liability the case undergoes assessment of tax through the process of adjudication under section 11 of the Act. Therefore, the self-assessed amount of tax due by the taxpayer in its sales tax return cm only be altered through audit. Section 11 provides for assessment of tax where a taxpayer fails to file a return, or pays an amount which is less than the amount of tax due or has made short payment or has claimed input tax credit or refund which is not admissible. This section further provides that where by reason of collusion or deliberate act any tax has not been levied or has been short levied or has been erroneously refunded, or by reason of inadvertence, error or misconstruction any tax has not been levied or short levied or has been erroneously refunded, the Officer of Inland Revenue passes an assessment order along with penalty and default surcharge.
Section 11 is the only provision under the Act which provides for assessment of tax through adjudication in case the self-assessed tax of the taxpayer , according to the department is unpaid or short paid for the above reasons.
In the present case before us, we have noted that the department defrauded the whole scheme of law and recovered the alleged sales tax demand along with penalty and default surcharge before adopting the procedure as laid down under section 11 of the Sales Tax Act, 1990. The recovery of tax along with default surcharge and penalty was made during the course of raid / investigation carried out under section 38 read with section 40 of the Act. The recovery of taxes was made merely on the basis of opinion of raiding / investigating party during the course of investigation. Perusal of the record reveals that audit investigation report was issue d / signed on 10.09.2015 and it was duly mentioned in the investigative audit report that the taxpayer deposited the due principal sales tax, penalty and default surcharge on 03.09.2015 and 09.09.2015. Perusal of this Investigativ e Report reveals that even the audit team prior to completion of the audit report has recovered the alleged due taxes. This is a case of merely extortion of money without adhering to the due *process of law .
We are of the view that whole exercise of recovery of taxes prior to issuance of show-cause notice and even prior to issuance of audit report is abuse of powers and any recovery without adhering due process of law cannot be construed as confession of the appellant because the same was deposited ostensibly under threat of criminal prosecution apprehending physical arrest. Such mode of recovery by the revenue department, without recourse of relevant provisions of Sales Tax Act, 1990, can only be termed as extortion. It is wholesome principle of law that a person depositing amount under any fear, stress and duress could not reasonably be expected its admission by him in the event of recovery of tax unlike perpetual tax evader and habitual actor of fiscal crime.
Issuance of show-cause notice under section 11 of Sales Tax Act, 1990 is a precondition for the determination of tax liability and a legal mechanism which could not be put at naught. In the present case, no show-cause notice for assessment of sales tax or as the case may be or recovery of -short levied or non-levied of sales tax under sections 11(2) and 11(3) of the Act was issued nor any order adjudging liability of sales tax was passed and whole exercise for recovery of sales tax was carried out without adhering to due process of adjudication as provided under law. Belatedly show-cause notice issued by the assessing authority and proceedings concluded seems to be just cover the recovery of tax already recovered by the department. In the absence of any adjudication, under the provisions of the Sales Tax Act, 1990 and proven fraudulent conduct resulting in tax evasion and tax fraud, to extort and extract recovery from the appellant through CPRs obtained under coercion is patently illegal and mala fide exercise of jurisdiction by the revenue department. It is now well-settled law that recovery of taxes from a taxpayer , without due process of adjudication of the case, which is his basic, fundamental, constitutional and natural right, cannot be equated with confession or admission of the charges itself at all which were yet to be adjudged upon.
The coercive recovery from the appellant under threat of suspension of registration / detention of Directors without final determination of legitimate liability of the appellant is illegal, without lawful jurisdiction and amounts to punishing him without due process of law as provided under section 11 of the Sales Tax Act, 1990. The ratio decidendi in judgments of Hon'ble High Court, Lahore in case of "Messrs G.M.H. Traders v. The Deputy Director , Directorate of Intelligence, Lahore " reported as (2009 PTD 1894 ) and in case of Messrs Ashraf Steel Mills v.
The Director Intelligence and others" reported as (2014 PTD 1506 ) are the most relevant 'on all fours' to the case facts and circumstances of the instant registered person.
In this behalf, we also gain strength from the judgment of Hon'ble Lahore High Court in case of "Messrs Taj International (Pvt.) Ltd. and others v. The Federal Board of Revenue and others" reported at (2014 PTD 1807 ) wherein it was laid down as under:- "It is settled law that recovery of tax is possible only after the tax has been duly assessed and the amount of "due tax" determined under the Act. Recovery under civil law is initiated once tax has been assessed through the civil adjudicatory process provided under the Act."
"In the absence of tax assessment under section 11 of the Act and without knowing the "amount or loss of tax involved," neither compoundability is possible nor the award of sentence against the taxpayer . Hence, the process of hauling up taxpayers and effecting recovery of self-determined amount of sales tax by the Officer of the Inland Revenue is brutally unconstitutional."
In another case of "Muhammad Afzal Shaheen v. Federation of Pakistan and others reported as (2014 PTD 1919 ), Hon'ble High Court, Lahore has held that petitioner was never issued a show-cause notice nor was any adjudication against him, no authority vest in adjudicating officer to saddle the petitioner with any liability of impugned demand.
7. It is the departmental stance before us that there is no need to issue a show-cause notice under section 11 as the appellant made payment of tax liability and availed the benefit of compounding of its offence under section 37A(4) and avoided any criminal proceed ings / registration of FIR against the Company and the Directors. In this behalf, we would like to refer the decision of the Hon'ble Lahore High Court reported as 2014 PTD 1807 , wherein their Lordships was pleased to hold that: - "22. Collective reading of sections 11, 25(5), 33, 37A and 72B of the Act indicates that the criminalization under the Act is principally to effectuate recovery or is being largely used to effectuate recovery . Two clear pointers are; dependence of fine on the "amount or loss of tax involved" and the window of compoundability available to the taxpayer who can pay the "amount of tax due along with such default surcharge and penalty as determined under the provisions of this Act." If the purpose was simple retribution and deterrence, there was no need to load the fine with the amount or loss of tax involved. However , if the fine under criminal prosecution is to be loaded with the amount or loss of tax, such a criminal construct must be prefaced with the mandatory requirement of assessment of tax through civil adjudication provided under section 11 of the Act. This precondition is the minimum constitutional requirement to ensure fair trail and due process under Articles 4 and 10-A of the Constitution".
(emphasis provided)
It is argued by the learned DR that there is no need to issue show-cause notice under section 11 and the belated show-cause notice after recovery of tax was actually issued on the wish / desire of the taxpayer . This is just a comedy of argument of the department and by saying that we presume that now the departmental hierarchies are performing their duties on the wishes of taxpayers and not under the requirement of law. It seems that belated show-cause notice was issued by the department just to give legal backing to the act they have done by illegally recovering the alleged sales tax demand without adopting due process of law .
In the present case, the department forcibly hauls up the taxpayer under the threat of arrest and criminal prosecution and releases them extraction of money shown as the amount of tax due under section 37A. It is the settled view of higher appellate for a that in the absence of tax assessment under section 11 and without knowing the "amount or loss of tax involved" neither compoundability is possible nor the award of sentence against the taxpayer . Hence, the process of hauling up the taxpayer and effecting recovery of self-determined amount of sales tax by the department is brutally unconstitutional and against the whole scheme of law .
Even preconditions defined under section 38 of Sales Tax Act, 1990, and section 40 ibid, were not followed in the present case prior to recovery of tax which renders the whole proceedings a nullity in the eye of law. The assumption of jurisdiction without preparation of recovery memo. against the procedure laid down under the law is sufficient to prove the illegality in the process and the record so recovered cannot be utilized against the taxpayer in any manner . Before making a search under the Chapter , the officer or other person about to made it shall call upon two or more respective inhabitants of the locality in which the place to be searched is situate to attend and witness the search and may issue an order in writing to them or any of them so to do. The search shall be made in the presence, and list of all things seized in the course of such search and the places in which they are respectively found shall be prepared by such officer or other person and signed by such witnes ses; but no person witnessing a search under this section shall be required to attend the court as a witness of the search unless specially summoned by it. When any person is searched under section 102, subsection (3) a list of all things taken possession of shall be prepared, and a copy thereof shall be delivered to such person at his request. The learned AR argued that the said issue was also taken up in first appeal. He invited us to the manner in which the learned first appellate authority had dealt the issue. He apprised that the learned first appellate authority has failed to completely understand the facts of the case and has rejected the submissions of the appellant in a causal manner and a very serious issue was brushed aside carelessly . In the cases where recover y was not made as per mandate of law, the honourable superior courts of the country have set aside the proceedings initiated on the basis of such illegal seizure as well as show-cause notices. The relevant para of the judgment of the Honourable Supreme Court of Pakistan in reference to section 96 to section 105 of the Cr.P.C. reported as 2007 PTD 2356 (Collector of Sales Tax v. Messrs Food Consultants (Pvt.) Ltd. and Messrs Diplex Beauty Clinic and others) is reproduced below:- "The mandate of law as enunciated in subsection (2) seems to be that search authorized under the provision of law shall be carried strictly in accordance with relevant provision of code of Criminal Procedure, 1898. Such provisions are contained in sections 96 to 105 of the code. Admittedly the petitioner did not invoke these important provisions of law while seizing the records of the respondent company . Thus the judgment of High Court is based on correct interpretation of law, under the circumstances and admits no interference".
The investigation in consequence of illegal raid is laps biased for the reason that before initiating the same, prior notice under section 38(1) of the Sales Tax Act, 1990 was not served in order to establish the fact that the person who is alleged to have concealed his sales or due tax, failed to produce record through ordinary process. Section 38 of the Sales Tax Act, 1990 gives way for coercive search if the compliance to the provisions of section 38 ibid are not made. The prosecution thus failed to establish a reasonable belief for the referred search, the same was, therefore, premature, against the mandatory provision of law as well as norms of justice and fair play. The object of the statutory provisions cannot be held redundant on such grounds. The use of the word "shall " in the provision of subsection (2) of section 40 of the Act, makes the procedure contained in the Code Criminal Procedure, 1898 as mandatory. The provision of section 103 of the Code of Criminal Procedures, 1898 clearly requires that all searches are to be conducted in the presence of two or more respectable inhabitants of the locality in which the place to be searched is situated to attend and witness the search. The detecting agency has not conducted raid in a lawful manner and the search and seizure, formalities under the law were also not observed and in this manner they have defeated the very object of the mandatory provisions of law. The Hon'ble Apex Court of Pakistan while dealing with the object of the statutory provisions of section 103 of the Code of Criminal Procedures, 1898 has elaborated in a case reported as PLD 1996 SC 574 as under:- "Prosecution witness who had headed the raiding party had admitted that people from the locality had gathered at the place of recovery at the time of raid - non-compliance with the requirement of S.103, Cr. P. C. namely to call two or more respectable inhabitants of the locality where the search was to be made as witness to the recovery , was not warranted and justified in circumstances --- Alleged recoveries having constituted the offences which were the subject matter of the terries, Trial Court and the High Court should have appraised and scrutinized the evidence of the police personnel with care and caution and should also have taken into consideration the factum that there was not justifiable reason not to comply with the requirement of S.103, Cr.P.C. -- Where both the courts have failed to do the needful their judgments were not sustainable in law and convictions and sentences were set aside by the Supreme Court".
Needless to say that by now it is well settled that if a thing is required to be done in a particular manner , the same has to be done in that manner . In case, the same is not done in the manner required under the law, any superstructure build thereon is required to be abolished. Reliance is placed on 2006 SCMR 129. The Hon'ble Court has observed as under:- "15. In the case of Khalid Saeed v. Shamim Rizwan and others 2003 SCMR 1505 this Court while considering the impact of violation or non observance of the method prescribed by law for doing an act in a particular manner or mode observed that if the law had prescribed method for doing of a thing in a particular manner , such provision of law is to be followed in letter and spirit and achieving or attaining the objective of performing or doing of thing in a manner other than provided by law would not be permitted".
The department levelled allegation of tax fraud as defined under section 2(37) despite the fact that it is time and again held by the Superior Courts that in order to attract the provisions of section 2(37) of the Act, initial burden lies on the department to show that the registered person, 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 or instructions issued thereunder with the intention of understating the tax liability or underpaying the tax. The initial burden to prove that the provisions of tax fraud were attracted, lies on the department and not on the taxpayer . The Honorable Lahore High Court, Lahore in the judgment reported as 2015 PTD 2256 has held: "11. Bare perusal of section 11(2) of the Act shows that against inadmissible claim of input tax credit or refund, the liability is not determined by the statute itself but it is left to the assessing officer to make an order for assessment by determining the amount of tax credit or tax refund which registered person has unlawfully claimed. The assessing officer under this provisions will not pass merely a stereotype recovery order but before making an assessment order under section 11(2) has to apply his mind to the facts and circumstances of each case independently and judiciously so as to determine the liabilities of the registered person including as to whether tax credit and refund was unlawfully claimed. In case, assessing officer come to a conclusion that no input tax amount was paid at all by the registered person then of course, registered person will be liable to payback the input tax credit and refund paid to him otherwise it will amount to defraud the public exchequer . However , if it is found that registered person has paid the input tax but same was not deposited by the supplier or fake invoice was issued by the supplier , then the primary responsibility to pay the tax due is upon the supplier and the Registered Person shall only be responsible once it is determined in terms of section 8A of the Act that registered person receiving the taxable supplies was in the knowledge or had reasonable ground to suspect that some or all of the tax payable in respect of that supply would go unpaid. Assessing Officer under section 8A is not required to prove that there was collusion on the part of the buyer but initial burden lies on the department to establish that taxpayer/buyer had prior knowledge and reasonable grounds to suspect that sales tax paid by him to a supplier shall be remained unpaid."
"16. Section 2(37) define "tax fraud", the purpose of controversy in hand "tax fraud"* means knowingly , dishonestly or fraudulently and without any lawful excuse making taxable supplies without getting registration under the Act or falsifying or causing falsification of the sales tax invoices. Tax fraud committed has civil as well as criminal consequences. The civil consequences of tax fraud are provided under section 21 of the Act which include suspension and blacklisting of registered person. Whereas criminal consequences of tax fraud are provided under clause 13 of section 33 of the Act. When a tax fraud is dealt as a criminal offence, it must be proved beyond reasonable doubt, as fundamental requirement of criminal law jurisprudence. However , when tax fraud is applied on the civil side in term of section 21 of the Act or rule 12(5) of the rules, then the initial burden on the department is only to the civil standard. Once, it is proved by the department that tax fraud is committed, then to avoid civil consequences, it is for the registered person to show that he was duly registered at the time of making supplies and has not falsified or caused falsification of tax invoices."
Perusal of the show-cause notice and impugned order passed in the case of appellant has revealed that the assessing authority has failed to dischar ge the onus lies upon him under the law, and in the order he has just reproduced the contravention report of Directorate of Intelligence and Investigation Inland Revenue, therefore, for these reasons, charge of tax fraud has no legal consequences.
8. Keeping in view the above discussions, particularly in the light of law, record and judgments quoted supra, the outcome is obvious that we are inclined to accept the appeal filed by the appellant/registered person and hold that the impugned show-cause notice and consequent orders of both the authorities below are illegal; void ab initio, without jurisdiction and are thus hereby vacated/cancelled.
9. The instant appeal filed by the registe red person is accepted on the grounds and in the manners as indicated above. Resultantly , the impugned recovery of sales tax made by the department without due process of law, is also declared illegal and without lawful jurisdiction.
10. Appeal succeeds in the above manner .