JUDGMENT: Mr. Justice Syed Mudasser Ameer.
Introduction:
1. This and the connected eight reference applications have been filed by the Director General Khyber Pakhtunkhwa Revenue Authority (DG, KPRA) under Section 71 of the Khyber Pakhtunkhwa Sales Tax on Services Act, 2022 against similar orders of the same date, e.g, 16.06.2022 raising the same question of law pertaining to limitation for adjudication and interpretation of Sections 40 and 68 of the Khyber Pakhtunkhwa Finance Act, 2013. Since the same questions of law and interpretation are involved, we intend to decide all the 09 reference applications through this consolidated judgment.
2. The details of the connected reference applications are given below; S.No. Case No. Title
1. Sales Tax Ref.
No. 95/2022DG KP Revenue Authority Vs M/s Bee Line
2. Sales Tax Ref.
No. 96/2022 DG KP Revenue Authority Vs M/s Haleem Telecom
3. Sales Tax Ref.
No. 97/2022DG KP Revenue Authority Vs M/s Reyan Telecom
4. Sales Tax Ref.
No. 98/2022DG KP Revenue Authority Vs M/s Ideal Trader & Developers
5. Sales Tax Ref.
No. 99/2022DG KP Revenue Authority Vs M/s Jadoon Communications
6. Sales Tax Ref.
No. 100/2022DG KP Revenue Authority Vs M/s Blue Dot
7. Sales Tax Ref.
No. 101/2022DG KP Revenue Authority Vs M/s Ashrafia Communication
8. Sales Tax Ref.
No. 102/2022DG KP Revenue Authority Vs M/s Haroon Traders Facts of the Case:
3. In all these cases, the adjudication was concluded apparently beyond the statutory limitation period prescribed by law. However, if the days attributable to adjournments sought by the taxpayer are excluded from the computation of the prescribed period, the adjudication would then fall within the legally provided timeframe. The determination of whether the adjudication is time- barred thus hinges upon the exclusion of the period of delay caused by the taxpayer's own requests for adjournments, as permissible under the applicable legal provisions.
4. It is also pertinent to highlight that adjudication under the Khyber Pakhtunkhwa Finance Act, 2013, may be conducted either under Section 40 or Section 68, with each section providing distinct parameters for the exclusion of time attributable to adjournments sought by the taxpayer. The applicability of these provisions directly impacts the computation of the statutory limitation period, thereby determining whether the adjudication falls within the legally prescribed timeframe.
Legal Framework:
5. Since the matter involves the interpretation of Sections 40 and 68 of the Khyber Pakhtunkhwa Finance Act, 2013, it is appropriate to reproduce the text of these provisions for ready reference; "40. Assessment of tax.--(1) Where on the basis of any information acquired during an audit, inquiry, inspection or otherwise, an officer of the Authority is of the opinion that a registered person has not paid the tax due on taxable services provided by him or has made short payment, the officer shall make an assessm ent of the tax actually payable by that person and shall impose a penalty and charge default surcharge in accordance with sections 64 and 65.
(2) No order under sub-section (1) shall be made unless a notice to show cause is given to the person in default within five years from the end of the tax period to which the assessment relates specifying the grounds on which it is intended to proceed against him and the said officer shall take into consideration the representation made by such person and provide him an opportunity of being heard if the person so desires.
(3) An order under sub-section (1), shall be made within one hundred and twenty days of issuance of the show cause notice or within such extended period as the officer may, for reasons to be recorded in writing, fix: Provided that such extended period shall ordinarily not exceed sixty days.
(4) In computing the period specified in sub-section (3), any period during which the proceedings are adjourned on account of a stay order or proceedings under section 89 or the time taken through adjournments by the person shall be excluded.
(5) An order passed under subsection (1), may be further amended as may be necessary when on the basis of any information acquired during an audit, inquiry, inspection or otherwise, the officer is satisfied that--
(a) any tax has been under-assessed or assessed at a low rate; or
(b) any taxable service provided by the person has escaped assessment.
(6) The Collector may amend, or further amend any order passed under sub-section (1) or (5), if he considers that the order is erroneous or prejudicial to interest of Justice.
(7) The provisions of sub-sections (2), (3) and (4) shall be applicable to an order passed under sub-section (5) and (6).
(8) Notwithstanding anything contained in this Act, the Authority may prescribe thresholds, parameters, standards and basis for assessment of supply value and the assessment of tax. ......
(68) Recovery of tax not levied or short-levied.--(1) Where by reason of inadvertence, error, misconstruction or for any other reason, any tax or charge has not been levied or has been short levied, the person liable to pay such amount of the tax or charge shall be served with a notice, within three years of the relevant tax period requiring him to show cause for nonpayment of the amount specified in the notice.
(2) Where by reason of some collusion, abetment, deliberate attempt, mis-statement, fraud, forgery, false or fake documents--
(a) any tax or charge has not been paid or is, short paid, the person liable to pay such tax shall be served with a notice within five years of relevant tax period, requiring him to, show cause for non- payment of such tax; and
(b) Any amount of the tax is refunded which is not due, the person obtaining such refund shall be served with a notice within five years of the receipt of such refund to show cause against the recovery of such refund.
(3) The officer shall, after considering the objections of the person served with a notice under subsections (1) or (2) or if the objections are not received within the stipulated period, determine the amount of the tax or charge payable by him and such person shall pay the amount so determined.
(4) Any order under sub-section (3) shall be made within one hundred and twenty days of issuance of the notice to show cause or within such extended period as the officer may, for reasons to be recorded in writing, fix provided that such extended period shall not ordinarily exceed sixty days.
(5) In computing the period specified in sub-section (4), any period during which the proceedings are adjourned on account of a stay order or proceedings under section 89 or the time taken through adjounments by the petitioner not exceeding thirty days, shall be excluded."
(Underlining supplied)
6. In the Khyber Pakhtunkhwa Finance Act, 2013, Section 40 and Section 68 outline distinct procedures for tax assessm ent and recovery, each applicable under specific circumstances.
Section 40 of the KP Finance Act, 2013 empowers the tax authorities to conduct audits of registered persons to ensure compliance with the Act. If discrepancies or non-compliance are identified during the audit, the authorities can issue an assessment order to recover any unpaid taxes. The process is initiated by a show-cause notice to the taxpayer, and providing an opportunity for the taxpayer to respond before any assessment is finalized. Section 68 on the other hand addresses situations where a taxpayer fails to submit the required tax return. In such instances, the tax authorities are authorized to make an assessment based on the available information and proceed to recover the assessed tax. This provision ensures that tax obligations are enforced even when taxpayers do not fulfill their duty to file returns.
7. The key distinction between Sections 40 and 68 of the Khyber Pakhtunkhwa Finance Act, 2013, lies in their scope, applicability, and procedural framework. Section 40 governs tax assessments that arise from audit proceedings, whereas in contrast, Section 68 pertains to cases where a taxpayer fails to file a tax return within the prescribed timeframe. This fundamental difference dictates how and when each section is invoked. Section 40 applies post-audit, following an investigative process, whereas Section 68 is triggered by non-filing, allowing for an ex parte determination of liability in case no reply/objection is received.
8. A particularly significant procedural distinction arises between subsection (4) of Section 40 and subsection (5) of Section 68, both of which regulate the exclusion of time consumed due to adjournments obtained by the taxpayer in the computation of the statutory limitation period.
Section 40(4) provides for an unrestricted exclusion of time for adjournments sought by the taxpayer. This provision reflects the legislative intent to prevent taxpayers from exploiting procedural delays to evade assessm ent. On the other hand, Section 68(5) imposes a restrictive ceiling, explicitly capping the maximum permissible exclusion of time due to taxpayer-sought adjournments at thirty days. This limitation recognizes the distinct nature of best judgment assessm ents, balancing administrative efficiency with taxpayer rights. The erroneous application of the thirty-day restriction provided under Section 68(5) to an audit-based assessment under Section 40 not only misconstrues the statutory framework but also frustrates the legislative intent, resulting in a miscalculation of the limitation period and an incorrect legal determination.
Therefore, any assessm ent arising from audit proceedings must strictly adhere to the procedural mechanism outlined under Section 40, and any deviation that introduces an extraneous limitation period warrants judicial correction.
Principle of Limitation in Tax Law:
9. The principle of limitation is a crucial component of tax law, designed to ensure certainty, finality, and procedural discipline in legal proceedings. It prescribes the statutory time frame within which legal actions, including tax assessme nts and recovery proceedings, must be initiated. The primary objective of limitation laws is to prevent undue delay, eliminate uncertainty, and protect taxpayers from indefinite exposure to liability. However, courts have clarified that limitation does not operate in an absolute manner in all circumstances and must be interpreted in light of the governing statute.
10. The Hon'ble Supreme Court of Pakistan in the case titled Messrs Tri-Star Industries (Pvt.) Ltd. versus Trisa Burstenfabrik AG Triengen and another reported as 2023 SCMR 1502 held that; "7. In order to comprehend the true spirit of any provision, whether it is mandatory or directory, the conception, acumen and stratagem of the Act and the enabling Rules should be considered for proper resolution. If we virtually converse in the differentiation and eccentricity flanked by 'mandatory' and 'directory' provisions, then we have to scrutinize the pith and substance and not exclusively the form. Sometimes a provision in the legislation seems to be mandatory, but substantially it is directory and, inversely, sometimes a provision seems to be directory but in quintessence it is found to be mandatory for compliance therefore, for all practical purposes, it is the fundamental nature which counts and should take preference and affinity more than the form.
If a provision gives a power as well as a duty, it is mandatory and the enabling text of law and rules should be interpreted as obligatory so that the underlying principle and raison d'etre is not contravened or flouted. ...
10.5. Province of Punjab through Secretary, Excise and Taxation Department, Lahore and others v. Murree Breweiy Company Limited and another (2021 SCMR 305). This Court referred to some foreign precedents that the test to determine whether a provision is directory or mandatory is by ascertaining the legislative intent behind the same. The general rule expounded by this Court is that the usage of the word 'shall generally carries the connotation that a provision in mandatory in nature. However, other factors such as the object and purpose of the statute and inclusion of penal consequences in cases of non-compliance also serve as an instructive guide in deducing the nature of the provision. If the provision is couched in prohibitive or negative language, it can rarely be directory, the use of peremptory language in a negative form is per se indicative of the interest that the provision is to be mandatory."
11. Similarly, in the case titled Commissioner Inland Revenue, Zone-II, Regional Tax Office (RTO), Mayo Road, Rawalpindi and another versus Messrs Sarwaq Traders, Adamjee Road, Rawalpindi reported as 2022 SCMR 1333, the Apex Court while discussing the interpretation of fiscal statues, held; "5. The rationale, as we understand, for prescribing a time frame is to ensure that tax matters be resolved at the earliest, within the relevant tax year, so that the taxpayer satisfies its liability and the Department is able to collect revenue, within the relevant tax year. This is important because taxes pay for public goods and services and is one of the main sources of revenue for the State.
Consequently, the intent of the legislature is to obligate the Commissioner (Appeals) to decide the appeal within 180 days. The question is whether this obligation is mandatory or is it directory. We find that its mandatory as the first time frame given under section 45-B(2) is 120 days, which is extendable, meaning that, the Commissioner can exercise discretion and extend the time where required. The only caveat is that reasons have to be given in writing, so that the discretion is not misused and is not exercised arbitrarily. The second time frame under section 45-B(2) is for extending 120 days by 60 days and nothing beyond 60 days. With the help of negative language, the legislature has created an obligation on the Commissioner (Appeals) to decide the appeal in a total of 180 days where the appeal is not decided within 120 days. This obligation renders the section mandatory as the Commissioner (Appeals) cannot go beyond 180 days, as the Commissioner's discretion is curtailed if the time needs to be extended beyond 120 days.
Consequently, the obligation fixed on the Commissioner (Appeals) to decide the matter within 180 days is mandatory and not directory.
6. Now, the question is what happens if the Commissioner (Appeals) does not decide the matter within the 180 days. To our mind, since this is a mandatory provision, if a decision is made beyond the 180 days as prescribed under section 45-B(2) of the Act, then such a decision made beyond the prescribed period is an invalid decision. This is because the statute requires the appeal to be decided within 180 days, hence, it has to be decided in the prescribed period. A similar view has already been taken in the case of Messrs Mujahid Soap and Chemical Industries (Pvt.) Limited v.
Customs Appellate Tribunal, Bench-I, Islamabad and others (PTCL 2019 CL. 555) where the provision under consideration was Section 179 of the Customs Act, 1969, which is pari materia to the provisions under consideration under the Act, which reads as follows: "S. 179(3) The cases shall be decided within one hundred and twenty days of the issuance of show cause notice or within such period extended by the Collector for which reasons shall be recorded in writing, but such extended period shall in no case exceed sixty days."
This Court concluded that the understanding of law is for the taxing authority to decide the matter within the prescribed 180 days. In another case, reported as The Collector of Sales Tax, Gujranwala and others v. Messrs Super Asia Mohammad Din and Sons and others (PTCL 2017 CL. 736), this Court has held that the ultimate test to determine whether a provision is mandatory or directory is that of ascertaining the legislative intent. The Court found that while the use of the word 'shall' is not the sole factor which determines mandatory or directory nature of a provision, it is certainly one of the indicators of legislative intent. Other factors include the presence of penal consequences in case of non-compliance, but perhaps the clearest indicator is the object and purpose of the statute and the provision in question. The Court concluded that it is the duty of the Court to garner the real intent of the legislature as expressed in the law itself.
7. In this case, the intent of the legislature is clear, to regulate and control the time frame within which an appeal must be decided. The second proviso to section 45-B(2) of the Act limits the discretion of the Court, by providing that the extension period cannot be extended beyond 60 days.
The restrictive words used, restricts the powers of the Commissioner and also shows that the intent of the legislature was mandatory and not discretionary. We also note that where the law regulates the manner in which public officials have to exercise power vested in them, then such provisions have to be interpreted in its legislative context. In this case, where the public authority is empowered to create a liability against a taxpayer, then such exercise of power must be performed within the prescribed time. This Court has already dealt with a similar issue on whether a provision is directory or mandatory in the case reported as Province of Punjab through Conservator of Forest, Faisalabad and others v Javed Iqbal (2021 SCMR 328) where the Supreme Court concluded that the intent of the legislature was relevant and to ascertain if its non- compliance causes injustice or inconvenience. The Court also finds that negative language used in a statute where it imposes a statutory duty on a public official means that the provision is mandatory even if no penalty is prescribed for it."
12. The principle of limitation in tax law serves as a critical safeguard against arbitrary and indefinite proceedings, ensuring procedural fairness and adherence to statutory mandates. The interpretation of limitation provisions depends on legislative intent and statutory language. Where tax statutes prescribe a definitive time frame using prohibitive or restrictive language, such provisions are deemed mandatory, rendering any action beyond the prescribed period invalid. This approach prevents tax authorities from exercising unfettered discretion in initiating or concluding proceedings outside the statutory framework.
Analysis of Limitation in Sections 40 and 68:
13. Sections 40(4) and 68(5) of the Khyber Pakhtunkhwa Finance Act, 2013, govern the exclusion of time due to adjournments sought by the taxpayer, yet they contain distinct provisions with significant legal implications. Section 40(4) explicitly stipulates that the entire period consumed due to adjournments sought by the taxpayer shall be excluded from the computation of the prescribed limitation period, without any restriction on the number of days that may be excluded.
In contrast, Section 68(5) introduces a specific limitation by capping the maximum period that may be excluded due to adjournments obtained by the taxpayer at thirty days. This distinction is of critical legal significance, as it delineates separate frameworks for the computation of limitation under different proceedings. However, in the present case, the Appellate Tribunal KPRA erroneously applied the thirty-day cap prescribed under Section 68(5) to a matter governed by Section 40, which does not impose any such restriction. This misapplication of law resulted in an incorrect computation of the limitation period, ultimately leading to an erroneous decision. Such an incorrect interpretation not only contravenes the express legislative intent behind these provisions but also vitiates the adjudicatory process, warranting rectification of the legal error.
Doctrine of Substantive Justice v/s. Procedural Compliance:
14. The legal system operates on two fundamental doctrines, Substantive Justice and Procedural Compliance. While both are essential for maintaining the rule of law, they serve distinct purposes and often come into conflict when courts are called upon to decide cases involving procedural irregularities. The Doctrine of Substantive Justice prioritizes fairness, equity, and the real intent behind the law over rigid procedural requirements. It ensures that justice is not denied due to mere technical lapses and emphasizes the actual rights and entitlements of parties rather than their ability to comply with legal formalities. On the other hand, the Doctrine of Procedural Compliance underscores the importance of following established legal procedures to maintain uniformity, predictability, and order in the legal system. It ensures that legal processes remain structured, preventing arbitrary decision-making and upholding the principle that laws must be applied consistently Procedural rules serve as safeguards against bias, errors, and abuse of power, guaranteeing that all parties are treated equally under the law.
However, a rigid application of procedural compliance can sometimes result in injustice, particularly when minor procedural lapses lead to the dismissal of meritorious claims.
15. The tension between these doctrines arises when courts must decide whether to prioritize procedural regularity or substantive justice. In many cases, courts attempt to strike a balance, recognizing that while procedures are necessary for an orderly legal system, they should not become barriers to delivering justice. In the case at hand, the Appellate Tribunal KPRA accepted the taxpayer's appeal by treating the assessment under section 68 instead of section 40, despite the Show Cause Notice indicating that it was issued as a result of audit proceedings. Strict procedural adherence would necessitate that the assessment be conducted under Section 40 of the KP Finance Act, 2013, as the Show Cause Notice was issued following an audit. However, the Appellate Tribunal's decision to treat the assessment under section 68, which is typically invoked when a taxpayer fails to file a return, suggests a departure from strict procedural norms.
Nonetheless, it is crucial to recognize that while Substantive Justice seeks fair outcomes, it should not undermine the importance of Procedural Compliance. Procedures are established to ensure fairness, transparency, and consistency in the application of the law. Deviating from these procedures without compelling justification can lead to unpredictability and may set a precedent that could be misused in future cases.
16. The Appellate Tribunal's misapplication of Section 68(5) to a case governed by Section 40 of the KP Finance Act, 2013 demonstrates a fundamental error in legal interpretation, where procedural compliance was compromised in an attempt to achieve a purportedly fair outcome. However, the doctrine of Substantive Justice cannot be invoked to override clear legislative provisions, particularly where statutory language unambiguously prescribes distinct procedural frameworks.
Procedural Compliance serves as the backbone of a just and predictable legal system, ensuring that adjudication is conducted within the bounds of statutory mandates. By imposing a limitation period that does not exist under Section 40, the Tribunal departed from the express intent of the law, thereby undermining the legitimacy of the adjudicatory process. Correcting this error is essential not only to uphold legal certainty but also to reinforce the principle that justice must be administered within the confines of the law, rather than through an erroneous application of equitable considerations. Consequently, the Tribunal's decision warrants reversal to restore procedural and legal correctness.
Conclusion and Decision:
17. The upshot of the above discussion is that the statutory provisions governing the exclusion of time due to adjournments sought by the taxpayer are enshrined in Sections 40(4) and 68(5) of the Khyber Pakhtunkhwa Finance Act, 2013. Although both provisions share similar language in principle, a fundamental distinction exists: Section 68(5) explicitly imposes a maximum cap of thirty days on the exclusion of time due to such adjournments, whereas Section 40(4) does not prescribe any such limitation. This distinction is pivotal in determining the correct computation of the limitation period in each case.
18. The Appellate Tribunal KPRA, while interpreting Sections 40 and 68 of the Khyber Pakhtunkhwa Finance Act, 2013, failed to consider that the Show Cause Notice issued to the taxpayer stemmed from an audit, which falls within the ambit of Section 40 rather than Section 68 of the said Act.
Consequently, by applying the thirty-day cap on the exclusion of time due to adjournments obtained by the taxpayer, the Tribunal has misinterpreted the law. The correct legal approach required the Tribunal to assess the matter under Section 40, wherein no such cap is prescribed, and the period consumed due to adjournments sought by the taxpayer is to be excluded in its entirety. Thus, the Tribunal's reasoning is flawed as it improperly applied a statutory cap to section 40 adjudication that is only applicable under Section 68, thereby rendering its decision legally unsustainable.
19. When the findings of the Appellate Tribunal are examined in light of the correct interpretation of the relevant legal provisions, it becomes evident, albeit based on the limited documentation available, that the assessm ent was made within the prescribed limitation period. Thus, for the reasons stated above, the instant reference applications are allowed, and the matter is remanded to the Appellate Tribunal KPRA for reconsideration. The Tribunal is directed to re-evaluate the case while duly accounting for all relevant documentation in computing the limitation period in accordance with the applicable provisions of the Khyber Pakhtunkhwa Finance Act, 2013, and where found to be in time, proceed to decide the cases on merit.