MR. JUSTICE UMAR ATA BANDIAL. (1). Respondent No. 1 ("the respondent") tax payer is a manufacturer of Rexine. Its record was audited from time to time relating to the years 2008-2009, 2009-2010 and 2010-2011. No misstatements, dishonest claim or suppression of liability was detected in these audits. The respondent claimed the benefit of zero rating for its product namely Rexine under section 4(c) of the Sales Tax Act, 1990 in respect of which admittedly notification was issued by the F.B.R. which allowed the requisite relief. However, for reasons prevailing with the petitioner authorities an investigative audit under section 38 of the Sales Tax Act, 1990 was undertaken for the assessm ent years 2010 to 2012 wherein alleged tax fraud was detected.
2. A contravention report was prepared. On the basis thereof a show cause notice dated 15.05.2014 for the tax period July, 2008 until July 2013 was issued to the respondent. An adverse assessment order dated 26.06.2014 was passed on the allegations leveled in the notice. The respondent's appeal before the Commissioner Inland Revenue (Appeals), Lahore was partly accepted on 25.08.2014 whereby the claims in respect of the tax period from July 2008 until April 2009 were found to be time barred. For the remaining period the liability of the respondent was affirmed on the basis that the latter had failed to prove the use of textile fabric in the manufacture of its product/Rexine. The show cause notice alleged that the claimed zero rated product, Rexine, fell under PCT heading 5903. This applies to textile fabrics, impregnated coated, covered or laminated with plastic. The respondents' inability to prove the use of textile fabric with its product was tantamount to the production merely of plastic sheets by the respondents. These were not eligible for zero rating. Consequently the respondent was disentitled to sales tax refund in the amount of Rs. 205.115/- million that had been collected during the relevant tax period, In addition its further claim of Rs. 248.544 million was found to be inadmissible.
3. The learned Appellate Tribunal in its judgment dated 11.11.2014 rejected the said finding based on the claim raised by the tax authorities. It was held, inter alia, that the departmental case was built on surmises and presumptions. No laboratory tests of the samples drawn during the investigative audit had been obtained; no third party verification of the sale and purchase, of goods (input and output) had been secured; the simple fact that the respondent manufactured Rexine rather than, plastic sheets was unchallenged in all previous audits and floated on the record. In the circumstances it was held that the show cause notice dated 15.05.2014 and the adjudicating order dated 20.06.2014 and 25.08.2014 based on the defective investigative audit were illegal.
Accordingly, the respondents appeal was accepted. Learned High Court in its impugned judgment dated 16.02.2015 has affirmed the view taken by the Tribunal because the re-audit and a second show cause notice to the respondent lacked legal basis in fact or law. It is argued by the learned counsel for the petitioner-tax authorities that the view taken by the learned High Court failed to notice that there is an allegation of tax fraud had been leveled against the respondent in the present case. Such an allegation involves a mixed question of law and fact and, therefore, the Tax Reference filed by the petitioner/department was maintainable and ought to have been allowed.
4. The Court asked the learned counsel for the petitioner-tax authorities to show the elements in the case that demonstrated the tax fraud. He submitted that the sales tax returns filed by the respondent lacked a declaration of the purchase of textile fabric without which according to the record the respondent was manufacturing just plastic sheets and not Rexine. By claiming zero rating, the respondent had understated his tax liability or over stated entitlement to tax credit or tax refund to cause loss to the exchequer. As a result the petitioner committed tax fraud within the meaning of section 2(37) of the Sales Tax Act, 1990; consequently, the proceedings initiated by the petitioner/department were both maintainable and justified.
5. We note that there is a strong factual element in the allegation of tax fraud leveled by the petitioner-tax authorities. It is that the respondents product lacked the use of textile fabric. This point has been dealt with by the two learned fora below, namely, the learned Appellate Tribunal and also the learned High Court. Having collected samples of the product of the respondent the petitioner tax authorities failed to get the same tested and reported by competent analysts. Hence, the factual allegation by the tax authorities is founded upon a personal visual impression and not an investigative finding. Testing was necessary because in three previous audits the declared term and condition of the respondent was accepted without objection. Such an omission casts a dark shadow on the bona fides of the re-audit and the second show cause notice. Without proving that the respondent's product was misdeclared the failure by the respondent to disclose the name of its unregistered supplier of textile fabric in sales tax returns is hardly material for alleging tax fraud.
Without alleging concealment or deception by the respondent there of such omission, the same can neither constitute proof of tax fraud nor justify a re-audit.
6. We, therefore, agree with the learned High Court and the learned Tribunal that on the factual plane the investigative audit by the tax authorities proceeded on presumptions and surmises. We are, therefore, not inclined to interfere with the impugned judgment of the High Court. revisions by the competent authorities. Therefore, it is advisable to consult the official sources or legal professionals for the most up-to-date and accurate information.