Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 25, 24 & 37‑C‑‑‑General Sales Tax Order 1 of 1999‑‑‑C. B. R. Circular No. C.5(49) ST‑Int‑Audit/2001, dated 17‑11‑2001‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)‑‑‑Access to record, documents, etc.‑‑‑Audit was initiated for the last five years‑‑‑Extension of audit beyond limitation as provided in General Sales Tax Order 1 of 1999 without approval of Assistant Collector‑‑‑Audit of exempt period‑‑‑Non‑issuance of audit certificate or audit report despite repeated reminders‑‑‑Validity‑‑‑No justification existed to carry on audit for months in violation of Central Board of Revenue's orders that audit should be completed within a few days and extension in time period should be obtained from the senior officers‑‑‑Contention that income‑tax records were furnished voluntarily was not acceptable‑‑‑Instructions contained in General Sales Tax Order 1 of 1999 had not been complied, the audit was not completed and the audit report had not been submitted‑‑‑If the Complainant/assessee did not clarify the variation in sales tax figures found by the auditors, it should have been reported to the Collectorate, and if necessary, a contravention case made out against the Complainant/assessee‑‑‑Audit had not been finalized which betrayed the arbitrary and unreasonable approach of the sales tax officials‑‑‑Process of audit was conducted contrary to the instructions of Central Board of Revenue and administrative excesses had been committed‑‑‑Department had not seriously examined the allegations made in the Complaint and the issue raised therein, and had not furnished comprehensive explanations and comments‑‑‑Federal Tax Ombudsman recommended that Central Board of Revenue to direct the Collector of Sales Tax and Central Excise to ask the Assistant Collector to complete the audit within fifteen days and furnish complete audit report within thirty days that the Collector to take action on the findings of the audit report submitted to him; that he should personally examine the issues raised by the Complainants with a view to determine the extent to which the process of audit deviated from the prescribed procedure and to take concrete corrective measures within one month and that Central Board of Revenue may like to take into consideration the proposals of the Counsel for improving the performance and preserving the integrity and goodwill between the assessees and the department and issue necessary guidelines.

Complaint No. 1032/K of 2002 and NTR 1991 High Court (8) ref.

Haji Yousuf Rehmatullah for the Complainant.

Muneeb Sarwar, Assistant Collector of Sales Tax (East), Karachi for Respondent.

FINDINGS/DECISION

Haji Yosuf Rehmatullah, Advocate and Tax Consultant, has submitted a complaint against the sales tax authorities in respect of their ongoing proceedings allegedly violative of Sales Tax General Order (STGO) 1 of 1999 and also the general directions issued by this office in the Complaint No. 1032‑K of 2002 in the case of Messrs Khawaja Brothers. He stated that the Complainants supplied printing material to several parties Pharmaceutical companies which were exempt from sales tax till 1998. However, they received a notice from the sales tax authorities for audit of five years including the period the supplies were exempt.

2. He gave a long list of facts, objections and grievances in respect of the audit notice and proceedings commencing therefore, which are summarized below: ‑‑

(i) Sales tax authorities issued unsigned/unsealed single Notice for Audit of five years 1997‑1998, 1998‑99, 1999‑2000, 2000‑2001 and 2001‑2002.

(ii) Notice also contained Audit of period during which the items in question exempt from sales tax. Audit commenced from 17‑10‑2002.

(iii) Auditor issued a notice, dated 24‑10‑2002 under section 25 of the Sales Tax Act 1990 for not furnishing certain documents listed in the letter. Complainants were unaware of any letter/requisition by the Auditor as alleged in the letter.

(iv) The letter revealed that Auditor had scrutinized income tax records and also examined the record relating to period of 1‑7‑1997 to 10‑8‑1999 when supplies of item in question were exempt from sales tax.

(v) Complainants requested (the Auditor) to furnish permission/ approval in writing of Assistant Collector extension of audit period/duration beyond four days and for the examination of income tax records as contemplated in GSTO 1 of 1999, dated and Circular No. C.5(49) ST‑Int‑Audit.2001, dated 17‑11‑2001 which remained un-complied/unattended and un -responded.

(vi) The record of the Assessee was not sealed and signed despite lapse of 200 days since audit was started.

(vii) Legally, single Notice for exempted as well as non‑exempted items and for auditable and non‑auditable period render the notice nullity and without lawful authority.

(viii) A number of letters, dated 15‑11‑2002, 18‑11‑2002, 26‑11‑2002, 3‑1‑2003 and 11‑1‑2003, addressed to relevant authorities pinpointing numerous illegalities, remained unattended and uncomplied.

(ix) The letters (requesting) for the compliance of General Directions (Recommendations) of the Federal Tax Ombudsman in Complaint No.1032‑K/2002 remained unresponded.

(x) Certified copies of certain documents required (by the Complainants) were not issued nor inspection of file allowed despite payment of official charges and quoting the decision of the High Court vide NTR 1991 H.C. (8).

3. The learned Advocate has dwelt at length on the point that an act or order without jurisdiction is void and nullity and it has no effect and no existence in the eye of law. In this regard he cited several judgments of the superior Courts. He contended that the entire proceedings carried out by the sales tax authorities were without jurisdiction and without lawful authority. He argued that from the issue of notice for audit till the proceedings to date by the authorities were hit by the decision of the superior Courts quoted by him. He went on to state that any action taken on the strength of an order/decision/direction which itself was without jurisdiction, would be equally illegal and without jurisdiction. The entire superstructure created on the strength of illegal proceedings would be totally unlawful irrespective of the merit of the issue and dispute.

4. The learned Advocate, stated that the legal scenario emerging from his discussion would be as follows:‑‑

(a) The principle of confidentiality was utterly violated due to scrutiny of the documents which were immune from Audit due to exemption from sales tax.

(b) Income tax records were examined in violation of STGO 1/1999 as not only record of exempt period was audited but for rest of the period as well without obtaining approval of Assistant Collector.

(c) The period of audit was extended beyond limitation (of 3 to 4 days) provided in STGO 1 of 1999 without the approval of the Assistant Collector.

(d) None of the record was sealed or signed, nor certificate of audit or audit report issued despite repeated reminders requesting the authorities to follow the directions issued by Federal Tax Ombudsman in disposal of Complaint No. 1032‑K of 2002.

5. He requested that the entire audit for the years 1997 to 2002 carried out by the Sales Tax Authorities and all subsequent proceedings be declared null and void and the following proposals be considered for implementation in all futures audits and proceedings, and guidelines be issued to preserve the integrity and goodwill of both assessees and the department:‑

(1) That limitation should be fixed for the affixation of seal and signature by the Auditors on the completion of the audit.

(2) That order‑sheet type pro forma be prescribed for the Auditor to enter the details of records/documents checked under his signatures as well as the Assessee/counsel during the Audit.

(3) That limitation be set for the issuance of Audit certificate by the Auditor.

(4) That maximum limitation be issued for the issuance of, comprehensive and speaking order by the sales tax office after the completion of audit.

(5) That Sales Tax Act, 1990 be amended to make Audit Report Appealable.

(6) That written approval be made mandatory from Assistant Collector for extension of period of audit from 3/4 days as prescribed in the STGO 1 of 1999.

(7) That condition of written approval prior to examination of income tax records be made mandatory and implemented in letter and spirit as contemplated in STGO 1 of 1999 and C.B.R. Circular No. C. 5(49) St‑Int‑Audit/2001, dated 17‑11‑2001.

(8) That sales tax authorities be prevented from further action till the issuance of audit report and expiry of the deadline of anneal period.

(9) That limitation of further proceeding be curtailed to reasonable period subsequent to expiry of appellate period of disposal of appeal.

(10) Written approval from higher authorities be made mandatory prior to the examination of Bank Record as the Auditors normally ask the questions which do not fall within their jurisdiction and violative C.B.R. Circular No. C. 5(49) ST‑Int- Audit/2001, dated 17‑11‑2001.

6. The Collector of Sales Tax and Central Excise (East), Karachi, replied to the complaint that for the statutory audit of the Complainants for 2001‑2002 and any previous un‑audited period, a letter was issued by the Assistant Collector on 29‑7‑2002 and audit was started on 29‑8‑2002.

The Complainants were asked to produce record of the last five years under section 24 of the Sales Tax Act but they produced records for last two years only and refused to produce the records for the years 1997‑2000 stating that during this period they were making exempt supplies only. However, according to their own records they were supplying printing material to non‑Pharmaceutical companies which were not exempt but taxable supplies. A notices was issued to them under section 25 of the Sales Tax Act to produce records for the last five years but they did pot respond. Another notice was given under section 37 but no reply was received. The Complainants violated the provisions of the Sales Tax Act and were liable to prosecution under section 37‑C.

7. The Collector stated that during the course of audit, the Complainants voluntarily produced income tax returns and the scrutiny of returns revealed variance in sales figures shown in the income tax returns and sales tax returns. They were asked to clarify the difference vide letter, dated 24‑10‑2002, but instead of justifying the difference in sales and responding to the notices, they wrote several letters to the Department. The Collector stated that since the complainants had suppressed sales with the intention of evading tax, they blamed sales tax officials for harassment and filed the complaint in the office of the Federal Tax Ombudsman.

8. In the parawise comments, he added the following points:‑

(i) during the past, the letters, issued by the Department were not stamped but the practice has been changed and all official letters were being stamped.

(ii) The registered person used to supply packing material to the pharmaceutical companies in 1997 but taxable supplies were also made at the same time.

(iii) Under STGO‑1 of 1999 it was assumed that the audit should be completed in three to four days but since the record was not produced to the auditor, the audit could not be completed in the stipulated time. The delay in finalization of audit was caused by non‑production of record.

(iv) Since the audit has not been finalized because of non‑production of records, the question of signing and stamping of the assessee's records and extension for audit did not arise.

The Collector requested that in view of the Complainants' utter disregard to the department's correspondence and wilful suppression of sales resulting in the evasion of tax, the complaint be dismissed.

9. During the hearing of the complaint Mr. Haji Yousuf Rehmat ullah, Advocate, submitted the following arguments:‑‑‑

(1) The notice for audit of the years 1997‑98 was barred by time under section 36(1) of the Sales Tax Act.

(2) The audit was started on 20‑8‑2002 and, according to paragraph 3(iii) of STGO No. 1 of 1999, should have been completed in three to four days unless extended by the competent officer. The audit, however, has not been completed so far and was continuing without permission for extension.

(3) C.B.R, vide letter C. No. 5(49) ST‑I&T. Audit/2001, dated 17‑11‑2001, had prescribed the documents be requisitioned by the officers of the sales tax department for audit, and in paragraph 2 it was clearly laid down that in case any documents other than those prescribed were required, the permission of the Collector was necessary. The audit team had no authority to ask for income tax records. It has been wrongly contended in the audit observation that the Complainants showed the income tax returns voluntarily.

(4) The audit officials did not sign the audit report on the excuse that the assessee/registered person had not produced documents required by them. On the other hand, the auditors issued audit observation vide letter, dated 22‑10‑2002. This situation is self contradictory. When the audit has not been finalized, the occasion for issuing audit observation should not arise.

(5) He sent several letters but did not receive any reply which amounted to maladministration.

(6) He sent two challans of Rs.25 each, dated 10‑1‑2003 requesting for copies of certain documents. The department did not provide the copies‑for which charges had been paid in clear violation of the High Court's decision. (Messrs H.M. Abdullah NTR 1991 H. C. 8).

10. The learned Advocate, stated that due to the illegalities committed by the department some of which have been mentioned above, he apprehended manipulation and arbitrary decision. He stated that he has made ten recommendations in his letter which may be examined and if feasible necessary direction be issued to the department to adhere to the acceptable recommendations to help the department as well as the taxpayers in the general administration of tax laws and restore confidence of the taxpayer in the department and its officials.

11. The Assistant Collector replied that since the financial year 1997‑98 ended in June 1998, the notice issued in July 2002 was within five years time limit as prescribed under section 24 of the Sales Tax Act. Whether any demand raised as a result of the audit of 1997‑98 would be feasible under law was another matter. The Assistant Collector had issued notice under section 25 of the Sales Tax Act and according to his understanding, this was sufficient to satisfy the requirements of extension of time‑limit prescribed in STGO 1/1999. He stated that the completion of audit was contingent on the production of records by the registered person. In case he failed to do so, the process of audit would continue till its completion.

12. With regard to the issue of audit observation during the course of ongoing audit, the Assistant Collector stated that the audit observation was issued to raise the demand within the permissible period. During the course of audit when any objectionable point came to its knowledge, the audit observations was issued immediately. This would enable the taxpayer to explain the audit observations and in many cases settle the same. With regard to the income tax returns checked by the audit officials, he stated that the registered person voluntarily produced the returns and the reply to the letters of the learned Advocate was given by the Assistant Collector, Audit, vide letter, dated 23‑1‑2003.

13. The learned counsel for the complainants has raised several important issues pertaining to the working of the Sales Tax Department and has also made a number of constructive proposals for improving the working of the department, implementation of the prescribed procedures, enforcement of the tax law and measures aimed at restoring and establishing confidence between the taxpayers and the tax officials. The problems central to the complaint relate to (i) the audit initiated in August 2002; (ii) the permission for extension not obtained from the appropriate officer; (iii) audit observations issued during the course of audit; (iv) no replies to the Counsel's letters; (v) unauthorized scrutiny of income tax record; (vi) and audit not yet completed although several months have passed since it was started. The Department has taken the plea the (i) audit was initiated after appropriate notice; (ii) the issue of notice issued by the Assistant collector sufficed for extension of time limit; (iii) the income tax records were voluntarily submitted; (iv) audit objections were issued to the taxpayers as a matter of routine; and (v) the audit had not been completed because complete records had not been submitted.

14. The fact that the audit was being conducted since August last year, apparently without permission from the controlling officer, portrays a disturbing feature of the working of the department. It seems that the Auditor has taken over the control of the working of the department as well as the Complainant's unit. The role of the supervisory officers seems to be minimal. This is a clear case of ongoing harassment of the Complainants on the part of the sales tax authorities almost on a permanent basis.

15. There was no justification to carry on audit for months in violation of C.B.R's orders that audit should be completed within a few days and extension in time period should be obtained from the senior officers. The argument that the income tax records were furnished voluntarily is not acceptable. The instructions contained in STGO 1 of 1999 have not been complied, the audit not completed and the audit report has not been submitted. The department has contended that variation in sales tax figures were found by the auditors. If the Complainants did not clarify them, it should have been reported to the Collectorate, and if necessary, a contravention case made out against them. But the current situation where the audit has not been finalized betrays the arbitrary and unreasonable approach of the sales tax officials, the process of audit being conducted contrary to the instructions of C.B.R. and clearly administrative excesses have been committed by them. It may be brought on record that the department has not seriously examined the allegations made in the complaint and the issues raised therein, and has not furnished comprehensive explanations and comments.

16. It is recommended that C.B.R. direct.

(i) the Collector of Sales Tax and Central Excise (East) to ask the Assistant Collector to complete the audit within fifteen days and furnish complete audit report within thirty days.

(ii) the Collector to take action on the findings of the audit report submitted to him; and

(iii) he should personally examine the issues raised by the Counsel for the Complainants in paragraphs 2 and 8 above with a view to determining the extent to which the process of audit has deviated from the prescribed procedure and take concrete corrective measures within one month.

(iv) C.B.R. may like to take into consideration the proposals of the Counsel for improving the performance and preserving the integrity and goodwill between the assesses and the department at paragraph 5 and issue necessary guidelines.

(v) Compliance of (i) to (iv) may be reported within two months.

C.M.A./997/FTOOrder accordingly.