SHAMS MEHMOOD MIRZA, J. This judgment shall decide the present petition and two connected Petitions Nos.55663 and 53626 of 2020 as a common question of law is involved in all the petitions.
2. The petitioners have called into question the notices issued to them by the respondents under section 11(2) of the Sales Tax Act, 1990 (the Act). It is agitated before this Court that the exercise of power under section 11 of the Act is predicated on section 25 of the Act and that unless an audit is conducted against the taxpayer or investigation is carried out during which it is discovered that the taxpayer has not paid the tax due on supplies made by him or has made short payment or has claimed input tax credit or refund which is not admissible under this Act, the proceedings against him under section 11(2) of the Act cannot be initiated.
3. Mr. Hasham Aslam Butt, Advocate, the learned counsel for the petitioner submitted that the officer Inland Revenue must have a belief based on some evidence/information that the case of the taxpayer falls in the parameters of section 11(2) of the Act. In this regard, support is sought from section 111 of the Income Tax Ordinance, 2001 which makes "definite information" a pre-requisite for making additions to the tax liability. It is stressed that in terms of section 122 of the Income Tax Ordinance, the assessm ent cannot be altered without holding an inquiry whereafter a show-cause notice is issued. Learned counsel emphasized that the petitioner is engaged in the business of manufacturing and exporting of textile goods and that such supplies are zero rated under section 4 of the Act and thus the petitioner can claim sales tax refund on monthly basis in terms of the procedure provided in Chapter-V of Sales Tax Rules, 2006. Rules 35 and 36, it is contended, stipulate that each refund claim is duly scrutinized and its audit is conducted by the Despondent department. In case of any discrepancy, in the record, the respondent department can serve the petitioner with notice under section 11(2) of the Act. He also placed reliance on judgment reported as Taj International (Pvt.) Limited and others v. Federal Board of Revenue and others (2014 PTD 1807), Messrs Lahore Electric Supply Company Limited v. The Federal Board of Revenue (2015 PTD 1) and The Federal Board of Revenue and others v. Messrs Chenone Stores Limited PTCL (2018 PTD 208).
4. Learned counsel for the petitioners in the connected writ petitions adopted the arguments of Mr. Hasham Aslam Butt, Advocate. They added that sales tax is premised on self-assessment paradigm and its supervision and monitoring is carried out through audit in terms of section 25 of the Act. It is only through audit that the department can identify whether the taxpayer has not paid the tax due on supplies made by him or has made .short payment or has claimed input tax credit or refund which is not admissible under this Act whereupon adjudicatory mechanism provided under section 11 is set in motion.
5. Learned counsel for the respondents supported the notices-issued to the petitioners under section 11 of the Act and submitted that issue of jurisdiction can very well be raised before the officer of Inland Revenue and that invoicing of the constitutional jurisdiction of this Court against issuance of notice simpliciter is not permissible.
6. Arguments heard.
7. The sales tax regime envisaged under the Act is based on self-assessment of tax by the taxpayer. Under the provisions of the Act, the taxpayer is granted the right to calculate and compute his own tax liability and to produce evidence of the tax paid at the time of filing of his tax return. The self-assessm ent tax regime correspondingly burdens the tax authorities to keep a check on the taxpayers to guarantee compliance of the provisions of the Act and to ensure that the due amount of tax is paid. In case of non-compliance by the taxpayer, the Act authorizes application of sanctions which include recovery of tax amount and penalties etc. The entire edifice of the self-assessm ent regime is structured on the reciprocal obligations cast on the taxpayer to divulge accurate information in the tax return and to extend full, cooperation to the revenue for the purposes of ascertaining the tax liability and to keep true and faithful record of his business transactions relevant for tax purposes.
8. To ensure compliance of the taxpayer obligations, the Act grants unto the tax authorities the power to detect, adjudicate and recover the amount of tax adjudged against the taxpayer. The Act lays down a comprehensive scheme for detection of taxpayers who have inter alia, failed to file tax returns or who have not paid the due tax or have short paid the tax or who are involved in tax fraud.
9. The provisions which allow the sales tax official to do the monitoring and detection are contained in sections 11, 25 and 38 of the Act.
10. Section 11 (2) of the Act for the purposes of this case is the relevant provision which reads as under:
11. Assessment of Tax and Recovery of Tax not levied or short levied or erroneously refunded:
(2) Where a person has not paid the tax due on supplies made by him or has made short payment or has claimed input tax credit or refund which is not admissible under this Act for reasons other than those specified in subsection (1), an officer of Inland Revenue shall after a notice to show- cause to such person, make an order for assessment of tax actually payable by that person or determine the amount of tax credit or tax refund which he has unlawfully claimed and shall impose a penalty and charge default surcharge in accordance with sections 33 and 34. '
11. Section 11 is the, only provision in the Act providing the adjudicatory mechanism for assessment of the tax liability. It is a provision which contains both the procedure for the assessment of tax and the substantive grounds on which assessment can be made by the Officer of Inland Revenue. A plain reading of the text of section 11 of the Act makes it apparent that it combines within its fold the authority of the Officer of the Inland Revenue' to detect the cases on grounds enumerated therein and the power to pass assessm ent order subject to the issuance of a show-cause notice and granting hearing to the taxpayer. This power can be exercised by the Officer of Inland Revenue based on tax returns filed by the person or with the help of the record already available with the department.
12. Before proceeding further in the matter, an insight into the legislative history of provisions of the Act in issue is essential as it shall have a material bearing on the controversy involved in these petitions. The Act in its original form contained two provision dealing with assessment of tax namely section 11 and section 36.
Section 11 in its original form dealt only with the cases of non-filing of tax return and assessment of tax in case the tax was incorrectly shown in the return. Its scope was however, substantially expanded by changes made through Finance Act, 2012 and inter alia, subsection (2) as it exists now was also added in section 11. Further changes were also made in section 11 through Finance Act, 2015. Through these amendments in section 11, a comprehensive procedure for adjudication was provided by the legislature for assessment of tax in cases of non-filing of return, short payment of tax, non-payment of tax on supplies, wrong claim of input tax or refund claim, failure to withhold tax, collusion, inadvertence, error or misconstruction in non-levy or short levy of tax. In short, section 11 now caters for adjudication of all the issues that can arise under the Act.
Section 36 as originally promulgated was a much more comprehensive provision which allowed adjudication in case of non-payment of tax due, short levy of tax by the taxpayer and also dealt with the erroneous refund claims. After amendments were introduced in section 11, as noted above, section 36 was omitted from the Act through Finance Act, 2012 as there was no apparent purpose for it to exist in parallel to section 11.
Section 25 originally contained only one provision requiring the registered person to produce the record in his possession or control to an officer of sales tax. The provision of audit through subsection (2) was added through Finance Act, 2003. Up to the promulgation of Finance Act, 2010, there was, however, no mechanism provided in section 25 for adjudication of the issues arising in the audit proceedings. Subsection (3) as it exists now was introduced through Finance Act, 2010 through which the Officer of Inland Revenue was authorized to adjudicate upon the issues raised during audit in terms of section 1.1 or section 36, as the case may be. The reference to section 36 was omitted through Finance Act, 2015 as section 11 amended through Finance Act, 2012 dealt with all the issues within the scope of section 36.
13. At this juncture, it would be in order to elucidate the scope of audit as section 25 is completely silent in this regard. The process for audit is initiated by summoning the record, or documents a person is required to maintain under the Act and on the basis thereof the Officer of Inland Revenue authorized by the Commissioner conducts the audit once in a year. It is universally accepted that the main goals sought to be achieved from audit include the determination of the accuracy of the tax return in relation, to tax liability and assessment thereof by the taxpayer; to review taxpayer's records to ascertain compliance with relevant tax laws; and to promote voluntary compliance and monitoring thereof. The Board has used several techniques and tools over the years to effectively increase the risk of detection of non-compliant taxpayers and has issued several audit policies from time to time starting from the year 2014 specifying a variety of factors and risk parameters for selection of cases of the taxpayers. The introduction to Audit Policy, 2019 states that the sales tax system, operates on self-assessm ent/compliance basis in which taxpayers' audit holds a significant position "as it aims at creating deterrence against non-compliance, false declaration and tax evasion."
The Executive Summary of the said Policy states that ".......the existing Audit Policy is a roadmap to promote compliance of tax laws, promoting tax culture and discourage the practice of giving false declarations with impunity by selecting taxpayers for audit." In short, audit is much wider in scope than the defection, assessm ent, and adjudication of tax under section 11.
14. A learned Division bench of this Court in the case of The Federal Board of Revenue and others v.
Messrs Chenone Stores Limited 2018 PTD 208 established the scope of audit by holding as follows: The concept of audit, as being internationally accepted, has travelled beyond mere verification of correct reporting by taxpayer and raising revenue. Besides creating deterrence by punishing the defaulting taxpayer, an effective audit program pinpoints noncompliant trends; defects in system, ambiguities in practice and law. On the basis of gathered information and intelligence from an effective audit, and its publication, future Tax Administration can be reshaped; necessary steps can be taken to suggest curative legislation and clarifications of ambiguous practices. The results achieved from effective audit program may help to improve risk management techniques and determine 'Parameters' for future selection of high-risk cases for audit.
15. Although the petitioners contend that the assessment of tax liability with respect to cases covered by section 11 was dependent upon the audit, there does not appear to be any apparent connection between the audit and adjudication of assessment of tax under section 11. Section 11 simply allows the Officer of Inland Revenue to detect the cases falling in the categories mentioned in the said provision and to adjudicate upon the assessment of tax. It does not make any reference to audit or the issues raised in the said proceedings. Section 25(3) itself does not identify the issues arising out of audit in respect of which adjudication shall take place under section 11. There is thus no mutual interdependence of the two provisions. Sales tax is premised on self-assessment by the taxpayer and as such the proceedings under section 11 are the original proceedings for assessm ent, which are limited to the grounds enumerated therein. A closer scrutiny of the section 11 would show that the adjudicatory mechanism can be set in motion once the existence of the conditions mentioned in section 11 come to the notice of the Officer of Inland Revenue by looking either at the sales tax return(s) or the record already provided by the taxpayer/registered person.
For example, if it is evident from the tax return or the documents provided along with it that a taxpayer has not paid the tax on the supplies made by him or that he is claiming wrong input tax adjustment or that he has failed to withhold tax or has not deposited the same, it, will lead to an absurd situation if the department selects him for audit to ascertain what is otherwise obvious from the record in order to proceed against him under section 11.
16. The Act as originally promulgated did contain the processes for assessment and adjudication of tax through sections 11 and 36 as is apparent from the legislative background noted above. By the introduction of subsection (3) of section 25 through Finance Act, 2010, the legislature simply made available the adjudicatory mechanism under section 11 for decision on the issues raised during the audit. There is nothing in the text of subsection (3) of section 25 to demonstrate that the adjudication under section 11 was intended to be dependent on audit more so when section 11 and section 36 pre-existed subsection (3) of section 25. In case the interpretation of the petitioners is accepted, it would amount to enlargement of the scope of section 25(3) which is not warranted by its text and not permissible by any accepted canon of statutory construction. It may relevant be pointed out that subsection (3) of section 25 was inserted in the Act through Finance Act, 2010 whereas section 11 was altogether substituted through Finance Act, 2012 and significant changes were introduced in it by adding new subsections therein. These changes brought new categories of cases within the purview of the Officer of the Inland Revenue enabling him to proceed with the assessm ent and adjudication thereof. Had the legislature intended to link the exercise of power under section 11 to audit, it would have referenced subsection (3) of section 25 in the existing, particularized categories of section 11. The fact that it did not do so militates against the construction put forward by the petitioners of the interdependence of the two provisions. Another way of looking at it is to ask whether section 11 can operate in the absence of subsection (3) of section 25. The evolution of section 11 through successive amendments under which its mandate was substantially enlarged demonstrates the evidence of legislative intent in keeping it as a separate and independent provision. The text of the two provisions, the objectives sought to be achieved by them, the legislative history and the structure of the Act does not indicate that the legislature designed them as complementary provisions intended to operate together. The fact that the eventualities covered by section 11 can also be unearthed during audit does not make the said provision contingent on audit. The legislative intent was simply to make available the adjudicatory mechanism of section 11 for resolution of all the issues raised during audit. This demonstrates that assessm ent of tax on any of the grounds mentioned in section 11 and adjudication thereof is not dependent on audit. This Court does not find anything in the text of section 25(3) indicating that the legislature intended the adjudication under section 11 to be dependent on audit.
17. There are other factors that make it obvious that assessment of tax on any of the grounds mentioned in section 11 are not audit dependent. The detection of cases under section 11 is made by the Officer" of Inland Revenue from the available record including the returns. The decision to conduct audit on the other hand is made by the Commissioner Inland Revenue after examining the documents and record maintained by the person which are summoned under subsection (1) of section 25. The controversy involved in the present case can also be determined by considering the structure of the Act. Both the provisions are placed in different Chapters of the Act. Chapter II deals with the scope, payment and rate of tax and contains provisions for determination of tax liability, tax credit, refund etc. Chapter IV, on the other hand, relates to record a registered person is required to maintain and deals with Invoicing requirements and the authority of the department to have access to the record. Similarly, Chapter VII deals with offences and penalties, Chapter VIII grants the right of appeal/reference to the aggrieved parties and Chapter IX provides the mechanisms for recovery of the arrears of tax. The placement of sections 11 and 25 in different Chapters of the Act is not without significance and clearly brings out the intent of the legislature that both the provisions were meant to operate separately. Moreover, the power under section 11 can be exercised within five years from the relevant date whereas an audit can only be conducted for a particular year. Section 11 directs the Officer of Inland Revenue to issue a show-cause notice to the taxpayer before the assessm ent of tax. Subsection (3) of section 25 requires from the Officer of Inland Revenue, after completion of the audit, to obtain registered person's 'explanation on all the issues raised in the audit. In case the taxpayer/registered person cannot offer reasonable explanation on the issues so raised, the Officer of Inland Revenue is authorized to adjudicate upon the same by recourse to section 11. Keeping in view of the scope of audit, it is apparent that a person is not necessarily selected for audit to discover the grounds mentioned in section 11. Audit as noted above, has a much wider context which is not concerned with the assessment of tax alone. That discovery of the conditions mentioned in section 11 can be made during audit is of no significance and cannot be made basis for linking the two provisions. Audit is a multi-faceted device with a much broader purpose, and it is certainly not about the assessment of taxes alone.
The text of the both the provisions does not suggest that the powers available to the Officer of Inland Revenue under section 11 are in any way dependent on and subject to audit of the taxpayer.
Audit and assessm ent of tax under section 11 are two separate specie of proceedings which have no correlation with each other.
18. The judgments relied on by the petitioners are also of no help to them. In the case of M/s. Lahore Electric Supply Company Limited v. The Federal Board of Revenue and others PTCL (2015 PTD 1) a learned Division bench of this Court was dealing with the interpretation of section 11A of the Act. In this case, the department had issued a notice to LESCO stating that the amount of sales tax to be charged from its consumers under Sales Tax Rules, 2007 was incorrectly reflected in the sales tax returns. It was the case of the appellant before this Court that the tax due in the sales tax returns was paid and that any discrepancy in the calculation could only be assessed under section 11 of the Act and only then resort could be had to section 11A. By virtue of the e-filing of the returns, it was concluded by the learned Division bench that section 11A has lost its efficacy as the new system did not entertain electronic returns if the amount of tax was less than the amount of tax due indicated in the return. In the course of discussion, the learned Division bench observed in paragraph 8 of the judgment as follows.
"Therefore, the self-assessed amount of tax due by the taxpayer in its sales tax return can only be altered through fresh assessm ent of tax under the section 11 of the Act, subject to the process of selection of a taxpayer through audit" The highlighted portion of the afore-noted passage is at best obiter dicta as the issue whether section 11 is only reserved for adjudication on issues raised during the audit was not the subject matter of the appeal. The perusal of the judgment itself shows that arguments on this point were not addressed by the parties. It is a fairly settled law that this Court is only bound by the obiter dicta of the Hon'ble. Supreme Court [see Irshads Ahmed Sheikh v. The State (2000 SCMR 814) and S. Muhammad Din & Sons Limited v. Assistant Director, Labour/Welfare Conciliation (PLD 1968 Lahore 1012)]. This Court is certain that had this aspect of the matter been fully argued the learned Division bench would not have made the said observations.
The judgment reported as The Federal Board of Revenue and others v. M/s. Chenone Stores Limited 2018 PTD 208 was relied on to support the proposition that an inquiry or audit must precede the issuance of a show-cause notice under section 11 of the Act. The learned Division bench of this Court while dealing with subsection (7) of. section 177 of the Income Tax Ordinance, 2001 which authorizes the audit even in the succeeding years held that such an audit can be carried out provided there are exceptional and reasonable grounds for doing so and that these grounds need to be confronted to the taxpayer in addition to giving reasons for selection for audit as is required by the first proviso to section 177. The ratio of this judgment, however, does not advance the propositions put forward by the petitioners as it has no applicability to the facts of the present case.
19. It is not the case of the petitioners that respondent No.4 had no jurisdiction to issue the show- cause notice or that the matters raised therein do not come in the purview of section 11 of the Act. It is an undisputed position of law that issuance of show-cause notice under a statutory provision can only be challenged on the questions of limitation and jurisdiction. The purpose and object of the show-cause notice under section 11 is to seek a reply from the taxpayer before initiation of assessm ent proceedings. It is a threshold to adjudication by the Officer of the Inland Revenue in case the taxpayer is unable to show-cause about, the absence of the case to proceed against him. Show-cause notice simply requires an answer from the taxpayer and cannot be questioned in writ proceedings save in exceptional circumstances. The interference by the Courts in the show- cause notice, therefore, is rare and not a routine manner. Mere assertions of a petitioner that the notice was without jurisdiction and/or abuse of process of law would not suffice as these assertions should prima facie also be established.
20. In the present case, the allegations contained in show-cause notice dated 03.09.2019 were based on information gathered from the audited accounts and sales tax returns filed by the petitioner. The allegations related to disposal of fixed assets amounting. to Rs.241,381,893/- by the petitioner without payment of sales tax and claiming of inadmissible input tax against purchases made from inactive/de-registered suppliers, the details whereof are mentioned in the show-cause notice. In addition thereto, the show-cause notice also alleged, excess input tax claimed on insurance, failure to deposit sales tax on advances from customers, suppression of sales tax by way of export declaration, suppression of sales and violation of section 73(3) of the Act. On the face of it, the allegations contained in the show-cause notice fall within the parameters of section 11(2) of the Act. The same is the case in regard to the show-cause notices in the other two connected writ petitions.
21. The petitioners have failed to convince this Court that there is any jurisdictional error in the show-cause notices issued to them. The factual allegations contained therein are required to be responded to by the petitioners. Any adjudication thereon by the Officer of Inland Revenue, if adversely affecting the rights of the petitioners, can be challenged in the manner and before the forums provided under the Act.
22. In view of what has been stated above, this writ petition as well as the connected writ petitions fail which are accordingly dismissed.