SHAHID KARIM, J.----This order will decide connected petitions W.P. No.26 of 2017 and W.P. No.862 of 2017 as well which involve the same question of law.
2. The challenge in these constitutional petitions is to the notification SRO 549(1)12006 dated 05.06.2006 ("SRO 549") on the ground that it has been issued in excess of jurisdiction conferred on the Federal Government by virtue of section 8(i)(b) of the Sales Tax Act, 1990 ("the Act, 1990"). As a consequence, show-cause notice No.314 dated 17.01.2017 has also been attacked as having been issued ultra vires on the basis of SRO 549.
3. The petitioners are engaged in the supply of locally produced coal falling under PCT Heading 27.01 and are therefore, in the estimation of the respondents, caught by the provisions of SRO 549 and are not entitled to input tax adjustment having been ousted from the said regime by the Federal Government under the powers conferred by section 8(1)(b) of the Act, 1990. It is the case of the petitioners that they have been supplying locally produced coal chargeable to sales tax at the rate of 17% and the sales tax liability of the petitioners is determined for a tax period on the basis of input tax adjustment made under Section 7 of the Act, 1990. The issue in these petitions relates to the period commencing from July, 2014 to January, 2016 for which input tax adjustment was duly claimed according to the petitioners. The show-cause notice served on the petitioners is incompetent and illegal on the ground that SRO 549 which is the source of the show cause notice, is itself without lawful authority and has been incompetently issued by exceeding the delegated authority conferred by the Legislature.
4. These cases involve the proper construction to be put on section 8(1)(b) of the Act, 1990, which provides that: "(8) Tax credit not allowed.---(1) Notwithstanding anything contained in this Act, a registered person shall not be entitled to reclaim or deduct input tax paid on
(b) any other goods or services which the Federal Government may, by a notification in the official gazette, specify.
5. On the other hand, the impugned notification SRO 549 has been issued by the Federal Government and reads as under: "In exercise of the powers conferred by clause (b) of subsection (1) of section 8 of the Sales Tax Act, 1990, the Federal Government is pleased to direct that no input tax adjustment shall be admissible to the registered persons making taxable supply of locally produced coal (PCT heading 27.01)."
6. Thus, SRO 549 above makes inadmissible the input tax adjustment to a registered person making taxable supply of locally produced coal. The ineluctable conclusion to be drawn from SRO 549 is that in case a person makes a taxable supply of locally produced coal, he will not be entitled to input tax adjustment in respect of that supply. However, SRO 549 does not specify any goods on which input tax has already been paid and which have been used for making taxable supplies and in respect of which the input tax adjustment has been denied. The power conferred by section 8(1)
(b) on the Federal Government has to be construed in its proper perspective and to square it against SRO 549 in order to arrive at the conclusion whether the SRO 549 has been competently issued or not.
7. A proper reading of section 8(1)(b) would ineluctably show that the provision denies the registered person to claim input tax paid on any other goods which the Federal Government may, by notification, specify. Therefore, the relation in section 8(1)(b) is to the goods on which input tax has been paid and not to the taxable supplies made by the registered person. According to the learned counsel for the petitioner, the Federal Government is empowered to specify goods on which input tax has been paid and in respect of which the input tax adjustment is denied to a particular registered person and cannot be construed to mean that the denial may be in relation to the ultimate taxable supplies made by that person without actually specifying the goods in respect of which the input tax was paid. There is considerable force in the contention raised by the learned counsel for the petitioner. For instance, in the present case, since no goods have been specified in the impugned notification in respect of which the input tax has been paid, the consequence is that the petitioners have been denied input tax adjustment on all kinds of goods which were used in making the taxable supply of locally produced coal. For, according to the learned counsel for the petitioners, there is a wide array of goods which are used for making the end product which is ultimately supplied by the petitioners. All of those goods have been ousted with one stroke by SRO 549 and the effect is that the petitioners have been denied input tax adjustment on all these goods without properly specifying any of them. A historical consideration of section 8(1)(b) clearly shows that the delegation has been made on the Federal Government to specify goods on which input tax has been paid so as to deny the deduction due to a registered person in terms of section 7 of the Act, 1990. It cannot be deemed that the Federal Government under the delegated authority conferred by section 8(1)(b) can merely specify the registered person in relation to taxable supplies being made by him without identifying the goods on which the input tax was in fact paid. By way of illustration, the learned counsel for the petitioners has referred to SRO 578(I)/1998 which was issued by the exercise of powers conferred by section 8(1)
(b) and which clearly specified the goods acquired otherwise than as stock in trade by a registered person and in respect of which the input tax was notified not to be claimed by that registered person. This is the proper procedure it seems that the power under Section 8(1)(b) has to be exercised by the Federal Government. On the other hand, the Federal Government has merely specified a registered person in the impugned SRO 549 impacting a certain kind of taxable supplies and thereby excluded all goods on which input tax has been paid from adjustment or deduction. This is clearly not the mandate of section 8(1)(b).
8. The learned counsel for the petitioners relied upon a judgment of the Sindh High Court reported as Ghandhara Nissan Diesel Ltd. v. Collector, Large Tax Payers Unit and 2 others (2006 PTD 2066) and the following observations made by the Division Bench: "17. We further find that the legislature has itself given entitlement to a class of goods in respect ,whereof input tax can be reclaimed or deducted and has further specified a class of goods, the payment of tax whereon, shall not be allowed to be reclaimed or deducted from the output tax.
The legislature has not empowered the Federal Government to create any other class of goods in general terms excluding the same from the purview of reclaim or deduction of input tax. It has merely empowered the Federal Government to specify meaning thereby, to mention particularly or determine the specific goods which otherwise entitle the registered person for re-claiming or deducting input tax, to exclude from such concession. Thus, creation of new class of goods in general terms disentitling the registered person from reclaiming or deducting input tax paid on such goods is not in consonance with the substantive provision contained in section 8(1)(b) of the Sales Tax Act. It is manifestly beyond the authority delegated to the Federal Government by the legislature. A perusal of the S.R.O 556(I)/96 dated 1.7.1996 which was superseded by S.R.O.
1307(I)/97 and Notification No. S.R.O 578(I)/98, dated 12.06.1998 which superseded Notification No. S.R.O 1307(I)/97 shows that the Federal Government specified goods in respect of which a registered person was not entitled to claim input tax. A reading of the two notifications further shows that the Federal Government itself held the view that the goods acquired by registered person for the purpose of taxable supplies made or to be made though they are not direct constituent and integral part of the taxable goods produced, manufactured or supplied we entitled to claim of deduction of input tax and therefore a necessity was felt for the exercise of delegated authority to specifically exclude them from the benefit of this provision. Under these two notifications no new class of goods as purported to be invented under S.R.O 1307(I)/97 was created."
9. The above observations regarding proper construction of section 8(1)(b) of the Act, 1990 are supportive of the stance taken by the petitioners.
10. The learned counsel for the respondents argued that SRO 549 has been properly issued and the nature of the registered person to whom the input tax adjustment has been denied has duly been mentioned and therefore the exercise of power by the Federal Government was proper and in accordance with the mandate of its delegated powers. As stated above, while issuing SRO 549 the Federal Government has travelled beyond the powers conferred on it which was restrictive in nature and merely allowed the Federal Government to specify the goods on which the input tax had already been paid and in respect of which the adjustment was to be denied. A notification under Section 8(1)(b) could not be issued merely to specify, a class of persons making a certain taxable supply for that would be tantamount to giving wide amplitude to a construction to be put on the powers conferred on the Federal Government. To reiterate, the notification can only be in respect of goods on which the registered person has paid input tax, and for which deduction is claimed. SRO 549 fails to meet that standard and is outwith the authority of the Federal Government.
11. In view of the above, these petitions are allowed. The impugned notification SRO 549 is held to be without lawful authority and of no legal effect.