UNITED EXPORTS COMPANY VS PAKISTAN

2000 P T D 1798

[Karachi High Court]

Before M. Shaiq Usmani, J

Messrs UNITED EXPORTS COMPANY through Proprietor

versus

PAKISTAN through Secretary, Ministry of Finance, Federal Secretariat, Islamabad

and 3 others

Suit No. 1600 of 1998, decided on 19/03/1999.

(a) Sales Tax Act (VII of 1990)---

----Ss. 36 & 48---Issuance of-show-cause notice---Requirement of---Scope-- Provision of S.48, Sales Tax Act, 1990, is penal in nature and the same cannot be enforced without a show-cause notice served on the party concerned---When S.48 is read in conjunction with S.36 of Sales Tax Act, 1990, it clearly lays down that serving of a show-cause notice is mandatory.

(b) Sales Tax Act (VII of 1990)---

----Ss.36 &. 48---Adjusting of duty drawback amount in a claim for arrears of sales tax, without issuance of show-cause notice---Contention by Authorities was that letter containing audit observation constituted show-cause notice-- Validity---No indication was found in that letter to the effect that the Authorities had given any intimation to the plaintiff of their intention to adjust the amounts due against any other payment that might be due to them by any other Government body---Where the law had provided for a show cause notice to be issued, it was necessary that such show-cause notice should clearly indicate that it happened to be a show-cause notice, so that the person to whom it was issued was aware that if he did not appear to show cause, adverse action might be taken against such person---No such intimation could be gleaned from the letter containing audit observation, consequently such letter did not constitute a show-cause notice under the provisions of Sales Tax Rules, 1992, or Sales Tax Act, 1990, in circumstances.

(c) Sales Tax Act (VII of 1990)---

----S. 36---Exercising lien on amount held by Collector of Sales Tax-- Jurisdiction---Collector of Sales Tax was fully entitled to exercise lien on the amounts held by him on account of refund of claim of a person---Such exercise of lien could not be regarded as violation of S.36 of Sales Tax Act, 1990, or the principle of natural justice.

Makhdoom Ali Khan for Plaintiff.

Musheer Alam, Standing Counsel for Defendants.

Date of hearing: 24th February, 1999.

JUDGMIENT

Brief facts of the case are that the plaintiff is registered as a manu facturer-cum-exporter under Sales Tax Registration No.12-00-6200-159-55 with the defendant No.3 since September, 1996. The Plaintiffs contend that for the purposes of encouraging exports, the Defendant No. l has enacted that the rate of sales tax will be zero percent under section 4 of the Sales Tax Act, 1990. The defendant No. I permits the exporters to claim a refund of the Sales Tax paid by them in acquiring the raw material used for making goods for exports. The defendant No. I also allows duty drawback on the export of goods under the Customs Act, 1969. According to the plaintiffs from the date of its registration they have been duly furnishing returns under the Sales Tax Act 1990 and no objection -at anytime was raised by any of the defendants on any of the returns submitted by the plaintiffs. Indeed the amounts claimed as refundable by the plaintiffs were duly refunded to it by the defendant No.3 and no objection of any kind time was ever raised. The plaintiffs state that in the month of December, 1997, the Auditors of the Sales Tax Collectorate inspected the record and stocks books and accounts for the year 1996-97 of the plaintiffs and did nor raise any objection. Nevertheless, the refund of Rs.3,240,745.66 for the month of October, 1998 for which the return was filed on November 14th, 1998 has not been made as yet. The plaintiffs further state that under the scheme of Federal Government, the ,plaintiff is entitled under the Customs Act, 1969 for duty drawback on its exports which are paid to it in the usual course. It appears that in about November, 1998 the defendant No.3, without any notice to the plaintiff unlawfully requested the defendant No.4 to impose embargo on the exports of the plaintiffs. Accordingly such embargo was imposed on November 28th 1998 by the defendant No.4 without assigning any, reason or without serving any notice. Upon enquiries from defendant No.4, it transpired that this embargo has been imposed at the request of defendant No.3 who had a claim for arrears of Sales Tax against the plaintiffs. Upon protest by the plaintiffs to defendant No.3, this embargo was withdrawn by the defendant No.4. However, when the clearing agent of plaintiffs approached the defendant No.4 for collecting the cheques due to them for duty drawback on 3-11-1998, he was informed that the defendant No.3, had issued a demand against the plaintiffs for a sum of Rs.21,347,000 and had requested the defendant No.4 to send all payments due to the plaintiffs towards duty drawback claims to the defendant No.3. The contention of the plaintiffs is that without any show-cause notice or without giving an opportunity of hearing to the plaintiffs, the defendant No.3 has unlawfully made a false claim and on its basis has collected the amounts due to the plaintiffs from defendant No.4 on account of duty drawback. The plaintiffs deny that the amount of Rs.21,347,000 is outstanding against the plaintiffs as arrears of Sales Tax. The plaintiffs contend that this act of the defendant No. l is without lawful authority and jurisdiction and against the principle of natural justice. The plaintiffs further state that up to 12-12-1998, an amount of Rs.1,566,534 has been received by the defendant No. 3 from the defendant No.4 against the duty drawback claim of the plaintiffs. Besides, the plaintiffs also maintain that they have refund claim of Rs.3,240,745.66 against the defendant No.3. Now through this suit the plaintiffs claim a decree for the amount that has been paid by the defendant No.4 to defendant No.3 i.e.. Rs.1,566,534 and also injunction restraining the defendants from taking any adverse action or passing any adverse order against or collecting any money from or due to the plaintiffs or delaying payment of its refund claims.

On the other hand the defendants through their written statement substantially admit that the defendant No.3 had indeed prevailed on the defendant No.4 to make the payments due to the plaintiffs on account of duty drawback and in fact to pass those amounts to the defendant No.3. However, the defendants claim that this was done because of the arrears of Sales Tax due against the plaintiffs and such demand was issued as per audit observation No. 128, dated 23-11-1998 and hence the recovery action by them was lawful and in the interest of the recovery of the dues. The defendants, aver in their written statement that the legal action has been in accordance with the Sales Tax Rules of 1992 and in this connection the issuance of show-cause notice was not required at all. The defendants, further maintain that the plaintiffs had adequate notice of the demand for Sales Tax because the Assistant Collector Refund had by letter dated 23-11-1998 informed the plaintiffs of the audit observation No.128 made by C.B.R. audit team which clearly showed that the recoverable amount of Sales Tax and the additional tax totalled to Rs.21,347,642.

When the parties appeared before me, the learned counsels of both the parties namely Mr. Makhdoom Ali Khan for the plaintiffs and Mr. Musheer Alain for the defendants agreed that there was no requirement to lead any evidence in the matter as the issues involved were purely legal and the entire suit can be decided on the legal issues. The parties, therefore, filed consent issues in the matter, which are as under:

(1) Whether in law the defendant No.3 could, without issuing any show-cause notice and/or passing any assessment order, attach the amount due to the plaintiff from the defendant No.4 and collect the same?

(2) Whether in law the defendant No.3, could, without issuing any show-cause ~ notice and/or passing any assessment order, stop payment of the refund amount due to the pl4intiff from the defendant No.4 on the ground that earlier it had made refunds which were not lawfully due?

(3) Whether actions in terms of (1) and (2) hereinabove were permissible under inter alia, section 48 of the Sales Tax Act, 1990, in view of the requirements prescribed in section 36 thereof?

(4) What should the order be?

My findings with regard to the above issues are as under:

ISSUES NOS. 1 AND 3: The learned counsel for the plaintiff -has maintained that under the principles of natural justice, the defendant No.3 could not direct the defendant No.4 to pay the amounts of duty drawback to defendant No.3 without first issuing a show-cause notice to the plaintiffs. Since two relevant provisions in this regard are section 36 and section 48 of the Sales Tax Act, 1990, it may be advantageous to reproduce these:

"36. Recovery of tax not levied or short-levied or erroneously refunded.---(1) Where by reason of some collusion or deliberate act any tax or charge has not been levied or made or has been short levied or has been erroneously refunded, the person liable to pay any amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within ten years of the relevant date requiring him to , show cause for payment of the amount specified in the notice.

(2) Where, by reason of any inadvertence, error or misconstruction, any tax or charge has not been levied or made or has been short-levied or has been erroneously refunded, the person liable to pay the amount of tax or charge or the amount of refund erroneously made shall be served with a notice, within three years of the relevant date, requiring him to show cause for payment of the amount specified in the notice.

(3) The appropriate officer shall, after considering the objections of the person served with a notice to show cause under subsection (1) or subsection (2), if any, determine the amount of tax or charge payable by him and such person shall pay the amount so determined.

Explanation.---For the purpose of this section, the expression "relevant date" means--

(a) the time of payment of tax or charge as provided, under section 6;and

(b) in a case where tax or charge has been erroneously refunded, the date of its refund.

48. Recovery of arrears of tax.---(1) Where any amount of tax levied, penalty imposed or demand raised under any bond or other instrument executed. under this Act is due from any person, the Officer of Sales Tax may:---

(a) deduct the amount from any money owing to person from whom such amount is recoverable and which may be at the disposal or in the control of such Officer or any Officer of Income Tax Customs or Central Excise Department;.

(b) require by a notice in writing -any person who holds or may subsequently hold any money for or on account of the person from whom tax may be recoverable to pay to such Officer the amount specified in the notice;

(c) stop removal of any goods from the business premises of such person till such time the amount of tax is paid or recovered in full;

(d) seal the business premises till such time, the amount of tax is paid or recovered in full'

(e) attach and sell or without attachment any movable or immovable property of the registered person from whom tax is due;

(f) may recover such amount by attachment and sale of any movable and immovable property of the guarantor, person, company, bank or financial institution, where a guarantor or any other person, company,, bank or financial institution fails to make payment under such guarantee, bond or instrument.

(2) For the purpose of recovery of tax, penalty or any other demand raised under this Act, the Officer of Sales Tax shall have the same powers which under the Code of Civil Procedure, 1908 (V of 1908). a Civil Court has for the purpose of recovery of an amount due under a decree. "

The provisions of section 48 above are penal in nature and consequently under settled law cannot be enforced without a show-cause notice being served on the party concerned. In any case it has to be read in conjunction with section 36, which clearly lays down that serving of a show cause notice is mandatory. However, the learned counsel for the defendant No.3 submitted before me that the copy of the audit observation dated 23-11-1998 was sent to the plaintiff and that constitutes such show-cause notice. It may be advantageous here to reproduce contents of the letter issued by Assistant Collector (Refund) Collectorate of Sales Tax, Karachi.

"SUB: AUDIT OBSERVATION N0.128 MADE BY C.B.R. AUDIT TEAM.

During the course of audit by the team of C.B.R the following amount has been pointed out recoverable against you alongwith addition tax due thereon.

Recoverable amount

Rs.91,93,438

(calculated upto

15-10-1998.

Additional tax

Rs.1,21,54,204

Rs.2,13,46,642

You are hereby directed to clarify your position within three days, otherwise the same will be adjusted from your refund claim."

A perusal of this letter would show that it does not contemplate to be a show-cause notice by any standards. It basically is an intimation of audit observation made by the C.B.R audit team and shows to the plaintiff the state of their account. This letter also admits the existence of a balance of the refund amount in favour of the plaintiffs and only states that in the absence of payment of the amount demanded it will be adjusted against that refund claim. There is no indication in this letter that the defendant No.3 had given any intimation to the plaintiffs of their intention to adjust the amounts due against any other payment that may be due to them by any other Government body. The law has provided for a show-cause notice to be issued and thus it is- necessary that such show-cause notice should clearly indicate that it happens to be a show-cause notice, so that the person to whom it is issued is aware that if he does not appear to show cause, adverse action might be taken against him. It is obvious that no such intimation can be gleaned from this particular letter. Consequently, I do not find that this letter would -constitute a show-cause notice under the provision of Sales Tax Rules, 1992 or Sales Tax Act, 1990.

ISSUE N0.2: Here the audit observation dated 23-11-1998 sent to the plaintiffs becomes meaningful. The fact remains that through this letter the plaintiffs were warned that the accounts in respect of the sales tax payable by them were certainly in arrears. Consequently, as per general -law the defendant No.3 were fully entitled to exercise lien on the amounts held by them on account of refund claim of the plaintiffs and such exercise of lien can -by no standard be regarded as a violation of section 36 of Sales Tax Act, 1990 or the principle of natural justice. Indeed in this letter, the offer was made to the plaintiff to clarify their position. It has been urged before me. that any clarification was indeed provided by the plaintiffs to the defendants. Under the circumstances, I find that the defendant No.3 were justified in stopping further payment of the refund amount to the plaintiffs without further clarification forthcoming from them.

ISSUE NO. 4 view of my above findings, I direct that:

(1) The defendant No.3 will transfer the amount of Rs.1,566,534 recovered back to defendant No.4 within one month.

(2) That the defendant No.4 is directed not to make payments of the duty draw back to the plaintiffs from this amount till a decision in this regard has been made by the defendant No.3 after serving a show-cause notice under the provision of section 36 of the Sales Tax Act, 1990 to the plaintiffs whereupon defendant No.3 is directed to give due opportunity to the plaintiffs to explain their point of view.

(3) The defendant No.3 is directed to examine the claim of refund of the plaintiffs afresh after giving due opportunities to them for being heard and till such re-examination is undertaken the plaintiffs will not be entitled to any refund claim.

(4) If after decision taken by defendant No.3 as per directions above the plaintiffs are aggrieved, they may avail of necessary remedies in ` law.

The suit is disposed of in the above terms

Q.M.H./M.A.K./U-1/KOrder accordingly.