MUHAMMAD SAJID MEHMOOD SETHI, J.- Through instant Reference Application under Section 47 of the Sales Tax Act, 1990 ("the Act of 1990") read with Section 133(1) of the Income Tax Ordinance, 2001 ("the Ordinance of 2001"), following questions of law, asserted to have arisen out of impugned order dated 20.08.2024, passed by learned Appellate Tribunal Inland Revenue, Lahore Bench, Lahore ("Appellate Tribunal"), have been pressed and argued for our opinion:- 1) Whether on the facts and in the circumstances of the case, the Appellate Tribunal Inland Revenue has failed to pass a just, fair, proper, reasoned and speaking order, as required under Section 24A of the General Clauses Act, 1897?
If so: i. Whether such a non-speaking order is not sustainable in the eye of law?
2) Whether on the facts and in the circumstances of the case, the Appellate Tribunal Inland Revenue has erred in law and fact both, while travelling beyond the allegation voiced and raised in the show cause notice and in the sheer ignorance and disregard of the law laid down by Supreme court in cases reported as (i) 2021 PTD 1392; (ii) 2023 SCMR 1856?
3) Whether on the facts and in the circumstances of the case, the Appellate Tribunal Inland Revenue was justified in ignoring that sales tax cannot be imposed firstly on the basis of presumption and without establishing and discharging onus to the effect that alleged sales were taxable supplies amenable to charge of tax under Sales Tax Act, 1990 and secondly tax cannot be imposed merely on the basis of difference in sales declared in the income tax return and the sales recorded in sales tax return?
2. Brief facts of the case are that petitioner is an Association of Persons (AOP). During interim scrutiny of monthly sales tax record, on account of certain discrepancies found in the results, declared by the applicant, pertaining to tax year 2022, a show cause notice was issued to the applicant-taxpayer, which culminated in passing of order-in-original dated 11.09.2023 whereof an amount of Rs.3,632,281/- stood recoverable along with default surcharge and imposition of penalty under the relevant provisions of law. The aforesaid order-in-original was upheld by CIR (Appeals) vide its order dated 16.01.2024. Being dissatisfied, applicant-taxpayer preferred second appeal before learned Appellate Tribunal, which was dismissed vide order dated 20.08.2024. Hence, instant Reference Application.
3. Learned counsel for applicant-taxpayer submits that learned forums below have travelled beyond the allegation voiced and raised in the show cause notice in violation of the dictum of law laid down by the Hon'ble Supreme court in cases reported as Messrs Fateh Yarn (Pvt.) Ltd.
Faisalabad v. Commissioner Inland Revenue, Faisalabad and others (2021 PTD 1392). He maintains that even otherwise, impugned Appellate Tribunal's order is absolutely non-speaking within the contemplation of the provisions of Section 24-A of the General Clauses Act, 1897.
4. Contrarily, learned Legal Advisor for respondent-department defends the impugned order by contending that learned counsel for applicant-taxpayer has failed to point out any illegality or legal infirmity therein.
5. Arguments heard. Available record perused.
6. The record reveals that the taxpayer was served with a show cause notice regarding alleged suppression or concealment in sales tax records when compared to income tax records for the period under consideration. The stance of the learned counsel for the applicant-taxpayer is that the learned forums below have exceeded the scope of the allegations raised in the show cause notice. Specifically, the alleged suppression of sales for the purpose of sales tax was based on a single claim: that there was a difference in the sales declared in the Income Tax Returns and the Sales Tax Returns. The counsel argues that the learned forums below have failed to consider that the sales declared in the Sales Tax Returns reflect sales transacted after the taxpayer's sales tax registration, whereas the sales declared in the Income Tax Return reflect sales conducted prior to the registration. It is contended that declarations made under the Income Tax Ordinance, 2001, alone cannot form the basis for determining taxable supplies under the Sales Tax Act, 1990, as the dynamics of the two fiscal laws are distinct from one another. Furthermore, unless taxable supplies are identified and the onus of proof is discharged by the respondent authorities, such sales cannot be presumed to be taxable supplies under the Sales Tax Act, nor can they be subjected to tax. The taxpayer asserts that the tax authorities should not take unilateral, arbitrary action or exceed the scope of the original show cause notice.
For facility of reference, operative part of the show cause notice is reproduced hereunder:- "Whereas during interim scrutiny of monthly sales tax records, you, of M/s SABIR PRESS CALENDAR, Faisalabad bearing Sales Tax Registration No.3277876252322 have declared results for the tax periods mentioned below and the following discrepancies have been observed:- SALES SUPPRESSION / CONCEALMENT IN SALES TAX RECORDS WHEN COMPARED TO INCOME TAX RECORDS During comparison of monthly sales tax returns with income tax returns for the tax years mentioned below, it has been noticed that the registered person being Manufacturer / Importer / Exporter / Service Provider has declared less sales / supplies in sales tax returns. The detailed discrepancy is as under:- Tax year Sales declared in sales tax returnsSales declared in income tax returnsSales suppressionSales tax recoverable @ 17% plus further tax @ 3% 2022 (01.07.2021 to 30.06.2022)4472301 22633709 18161408 3632281 Now, on the basis of aforesaid facts, you M/s SABIR PRESS CALENDAR, Faisalabad are charged with the violation of section 3, 6, 7, 11, 22, 23 & 26 of the Sales Tax Act, 1990 and are accordingly called upon to show cause under section 11(2) of the Sales Tax Act, 1990 as to why sales tax amounting to Rs.3632281/- may not be recovered along with default surcharge and penalty under section 34 and 33 of the Sales Tax Act, 1990 respectively.
3. Initial hearing of the case has been fixed for 06.06.2023 at 11:00 AM in the office of the undersigned situated at Regional Tax Office, Jail Road, Faisalabad. You are directed to attend the date of hearing so fixed either yourself or through your legal representative along with relevant record to defend the charges. If no one appeared or no written reply to the show cause notice is received within the stipulated time, the case will be decided ex-parte on the basis of the facts available on record."
7. Where, in response to a show cause notice, the taxpayer raises substantial grounds or presents significant factual aspects that were not covered in the initial notice, and which therefore require further inquiry or verification by the department, a fresh or supplementary show cause notice should be issued to the taxpayer if necessary after conducting such further inquiry. No determination can be made regarding these new grounds or facts unless the taxpayer is given the opportunity to respond to any deficiencies or misrepresentations found in relation thereto, with such issues specifically alleged in a fresh or supplementary show cause notice. Therefore, it would be appropriate that, instead of proceeding under the original show cause notice, a fresh or supplementary notice be issued to the taxpayer in light of the defense presented. In light of the grounds or facts raised in the taxpayer's defense, which were unknown to the tax authorities and thus not part of the original show cause notice, no further action should be taken under the initial notice. Any adjudication on these grounds would be legally unsustainable, rendering the entire process redundant. Charges or allegations in a show cause notice must be specific; otherwise, the taxpayer would be prejudiced and denied the right to a fair trial. The adjudicating authority must confine the proceedings to the specific charges and allegations clearly stated in the show cause notice. Adjudicating a charge or allegation not addressed in the notice would not be legally valid.
In the present case, after the appellant's response to the show cause notice, the new situation that emerged should have been addressed through a fresh show cause notice, but this was not done.
The rationale for not exceeding the scope of the show cause notice is that the aggrieved party must be given the chance to present their case; otherwise, this would violate the principles of natural justice, as the aggrieved party would not have been aware of the new grounds or factual elements and could not have properly defended themselves before the concerned authority.
Reference can be made to Commissioner Inland Revenue v. Messrs RYK Mills (2023 SCMR 1856), Commissioner Inland Revenue, Chenab Zone, RTO, Faisalabad v. Messrs Rose Food Industries, Faisalabad and another (2023 SCMR 2070) and Hyderabad Chamber of Commerce and Industry
(HCCI) through duly authorized person v. Ministry of Commerce Government of Pakistan through Directorate General of Trade Organization and 4 others (PLD 2024 Islamabad 350).
While dealing with similar proposition, the Hon'ble Supreme Court in the case of Messrs Fateh Yarn supra, observed as under:- "7. Likewise, it is an accepted fact that the allegation levelled against the petitioner in the notice was for the period ending in March 2005. However, the subsequent orders passed by the fora below have imposed a tax liability on the petitioner for the period ending in January 2006. This Court has already held in The Collector Central Excise and Land Customs v. Rahm Din (1987 SCMR 1840) that an order of adjudication passed on the basis of a ground not stated in the notice is 'palpably illegal and void on the face of it [para 7]. We see no reason why the same logic should not extend to an order imposing a tax liability for a time period not mentioned in the notice. The purpose of serving a notice on a taxpayer is to notify him of the case against him. When such a document contains incomplete information it can seriously prejudice the taxpayer's defence. As the petitioner has undoubtedly been saddled with a tax liability for a period which was not disclosed in the notice, we exclude the said additional period (March, 2005 till January, 2006) from the purview of the impugned orders passed by the Collector and Collector (Appeals). Accordingly, the taxing officer shall recalculate the outstanding tax liability of the petitioner from the period December, 2001 to February, 2005."
In Ramlala v. State of U.P. and others [2023 SCC OnLine (All) 2479], the High Court of Judicature at Allahabad observed that a person must be accorded a fair chance to put up his case and therefore the authorities cannot traverse beyond the show cause notice. In Associated Switch Gears and Projects v. State of U.P. and others (2024:AHC:12780), the High Court of Judicature at Allahabad ruled that the significance of adhering to the confines of a show cause notice lies in upholding the rule of law and preventing the arbitrary exercise of powers. Any action taken by an authority beyond the scope defined in the notice risks transgressing the boundaries of legality and procedural fairness. Such overreach not only undermines the legitimacy of the authority but also compromises the rights of the individuals or entities involved, potentially leading to legal challenges and eroding public trust. The Supreme Court of India in the case of The Board of High School and Intermediate Education, U.P. v. Kunari Chitra Srivastava [(1970) 1 SCC 121] has categorically stated that the principle of audi alteram partem was required to be followed even if the same was burdensome in nature. In the said case, Justice S.M. Sikri observed: Principles of natural justice are to some minds burdensome but this price - a small price indeed - has to be paid if we desire a society governed by the rule of law.
8. A bare perusal of the record reveals that the learned Appellate Tribunal has not independently addressed the material aspect of the matter. As a result, the impugned order fails to meet the requirements of a speaking order as contemplated under Section 24-A of the General Clauses Act, 1897. It was obligatory for the Appellate Tribunal to examine the case with proper application of mind and to provide reasons in support of the impugned order. However, such reasoning is conspicuously absent in this case, rendering the impugned order unsustainable in the eyes of the law. Reference can be made to Pakistan Water and Power Development Authority (WAPDA), WAPDA House, Lahore v. The Commissioner Inland Revenue and others (2022 SCMR 824).
9. In view of the above, our answer to the proposed questions No.1 & 2 is in the affirmative and, to question No.3 is in the negative i.e., in favour of applicant-taxpayer and against the respondent- department.
This Reference Application is decided against respondent-department.
10. Office shall send a copy of this judgment under seal of the Court to learned Appellate Tribunal as per Section 47 (5) of the Act of 1990.