Sales Tax Act (VII of 1990)‑‑‑

‑‑‑‑Ss. 45 & 73‑‑‑Establishment of Office of Federal Tax Ombudsman Ordinance (XXXV of 2000), S. 2(3)-‑‑Appeal‑‑‑Audit department had pointed out that input tax was claimed against purchased negative units and recommended action for recovery of tax involved and imposition of penalties‑‑‑Undertaking was given by the assessee under protest to adjust the outstanding liability from pending admissible refund claims and to make adjustment against purchase from negative units‑‑ Department proceeded to recover the amount and adjusting the liabilities against sanctioned sales tax refund with the intention to adjust the same against future refunds due without initiating any judicial proceedings/ adjudicating the matter under S.45 of the Sales Tax Act, 1990 and relying on such undertaking in spite of compliance with the provision of S.73 of the Sales Tax Act, 1990 by the Complainant/assessee‑‑‑ Validity‑‑‑Assessee appeared to have acted under pressure as revealed by both the audit report and the so‑called undertaking‑‑‑Department's actions to recover the amount in cash and adjustment of refund against so‑called liabilities were premature‑‑‑End of justice will be served if the case against assessee based on audit report was properly adjudicated after issuing a show‑cause notice giving the complainant the opportunity of being heard to determine whether or not the liabilities created by the audit were sustainable‑‑‑Federal Tax Ombudsman recommended that Central Board of Revenue to direct the Collector to confront the complainant with the charges/contraventions against it through a show‑cause notice giving it the opportunity of both written and oral defence before deciding the case on its merit through a formal Order‑in‑Original and that amount already recovered in cash and adjustment of refunds against liability created in audit report may be adjusted/refunded, as the case may be, in consequence of Order‑in -Original.

Mumtaz Hussain Bhutta for the Complainant.

Taimoor Kamal Malik, A.C. for Respondents.

DECISION/FINDINGS

This complaint alleges maladministration against Sales Tax Department, Lahore for illegally recovering an amount of sales tax and for continuing to adjust their input refunds against the so‑called liabilities worked out by their audit tam causing harassment to the complainant. The facts of the complaint are that the complainant, a manufacturer‑cum exporter registered with the Sales Tax Department, manufactures textile made‑ups, canvas etc. by purchasing yarn, canvas and other materials from the open market on payment of sales tax and exports made‑ups. After export, refund of sales tax paid on the raw materials is claimed from Sales Tax Department. The audit of the unit conducted for the period 1999‑2000, 2000‑2001, and 2001‑2002 was completed vide audit report No. 205, dated 6‑3‑2003. The audit report had pointed out discrepancies that (i) the complainant had submitted tax return for the month of March 2002 late after due date attracting a penalty of Rs.5000, (ii) complainant's failure to give proof of payment as envisaged under section 73 of the Sales Tax Act, 1990 for an amount of Rs.6,34,823 (Sales Tax of Rs.82,802) warranted action against it, (iii) it's failure to discharge the tax liability of local supplies i.e. wastage of M. Pipes also warranted action under the appropriate provisions of law. Subsequent to the issue of audit report the respondents did not submit any contravention report to any adjudicating officer for adjudging the issues involved or for determining the alleged tax liabilities pointed out by the audit. Instead the functionaries of the department arrogated to themselves the powers and functions of the adjudicating officers and got an amount of Rs.129,558 deposited by adopting coercive measures, including threats of arrest. The complainant had claimed genuine input refunds on purchases from various units but the respondents forced it to undertake/agree for adjusting the amount of refund already sanctioned against undetermined liabilities because of purchases allegedly made from units branded as suspicious and included in suspicious units list. The complainant had claimed a total refund of Rs.2,569,610 during the period from 8 of 1999 to 2 of 2000 out of which an amount of Rs.1,179,525 was sanctioned, leaving a balance of Rs.1390085. The adjustment by the respondents of the so‑called liabilities against the sanctioned refunds and against likely amounts to be sanctioned in future, is unlawful because the liabilities have not been adjudged. The complainant had purchased the goods against payment made in terms of section 73 of the Sales Tax Act, 1990 and had used the raw material in the manufacture of tents exported by it. Even the Audit team did not observe that purchases were fictitious or that the exports were dubious. The respondents may be directed to refund the amount of Rs.129558, which was got deposited under coercion and be stopped to adjust its already sanctioned/to be sanctioned refunds against un‑adjudged liabilities and allow refunds due to it. Also the assumption of adjudication powers by audit officer may be declared illegal.

2. In reply, the respondents have stated that no doubt the matter was not adjudicated under section 45 of the Sales Tax Act, 1990 but the normal practice was that the department after completion of an audit discussed the audit findings/observations with registered persons and if registered persons agreed with the observations they deposited the arrears detected by the auditor give undertakings to deduct the liabilities from admissible refund claims pending with the department. Since the complainant's case fell in this category it's case was not sent up for adjudication. The complainant had in fact undertaken for deduction of recoverable amounts from its pending admissible refund claims. Had it not agreed, the proceedings would have been initiated under section 45 of the Act for proper adjudication. The amount recoverable was, therefore, deducted as per undertaking given voluntarily without coercion. The purchases from the negative units were discussed with the complainant who gave an undertaking voluntarily for deduction of the amount involved against purchases from units included in the negative list and to reclaim the amount of input tax involved on issuance of NOC to units included in the list. It could still claim refund of input tax subject to clearance of the units from the negative list. The complainant was not harassed. The complaint may be rejected.

3. During the hearing the AR reiterated the points earlier advanced in the written complaint contending that the amount of Rs.129558 was got deposited through coercion. In fact, the challan of deposit was filled in by one of the officers of department (Mr. Muhammad Ashraf, Deputy Superintendent) who took the money from the complainant in cash and deposited the same in the bank. The undertaking said to have been given voluntarily was in fact forced out of the complainant, which is unlawful. The complainant's input refunds have been illegally withheld and are being arbitrarily adjusted against so‑called liabilities despite the fact that it had complied with the provisions of section 73 of the Sales Tax Act, 1990 by making necessary payments through banking channels. They should adjudicate upon the discrepancies detected by the Audit by giving a proper show‑cause notice and an opportunity of hearing to enable the complainant to defend its case. The AR also referred to FTO's ruling in the case of Messrs Arzo Textile Mills, Faisalabad emphasizing that if any recovery was to be effected it should be effected from the suppliers and not from the purchaser who purchased the goods from registered persons after payment of sales tax.

4. The DR submitted the total liability created by the audit was Rs.2,270,355 (tax plus additional tax and penalty) an amount of Rs.128,000 was deposited (principal tax and additional tax) by the complainant. The input tax of Rs.1,179,525 was refunded to the complainant, which it was to return. It undertook to give back the amount already received and also agreed to adjustment against future refunds. It had given the undertaking voluntarily.

5. The arguments of the parties and the record of the case have been considered and examined. The audit report on record reveals that the audit had pointed out various discrepancies and recommended action for recovery of tax involved and imposition of penalties under various provisions of Sales Tax Act, 1990. Admittedly, the respondents did not initiate any judicial proceedings and relying, instead, on an undertaking given by the complainant proceeded to recover an amount of Rs.1,29,558 and started adjusting the so‑called liabilities against sanctioned sales tax refund with the intention to also do that against future refunds due to the complainant. The respondents claim that they were justified to do that because the complainant had agreed to this arrangement voluntarily. On the other hand the complainant denies having filed a voluntary undertaking disentitling it to judicial proceedings to determine the liabilities or to its input refunds. The demand of the complainant that the case against it should have been properly adjudicated after due process of law is legitimate. It is prepared to face the judicial proceedings, so long as it is issued a show‑cause notice and provided the opportunity of defence, written as well as oral. The department's contention that the complainant had given the undertaking voluntarily is belied by the audit report itself. In the last para. of the report the audit team states in conclusion that they have agreed to adjust the outstanding liability from their pending admissible refund claims and have given written undertaking. It is pertinent to mention here that the registered persons have agreed to make adjustment against purchase from negative units under protest and will claim refund after issuance of NOC to these units". Again the undertaking, dated 6‑3‑2003 (on record) reveals that the complainant had shown willingness to make adjustments in the manner as mentioned above but under protest. This position knocks out the department's contention that the complainant had given the undertaking voluntarily. The complainant appeared to have acted under, pressure as revealed by both the audit report and the so‑called undertaking. It appears that the respondents' actions to recover the amount in cash and adjustment of complainant's refund against so‑called liabilities are premature. Based on the foregoing discussion it is felt that the ends of justice will be served the case against the complainant based on the audit report is properly adjudicated after issuing a show‑cause notice and given the complainant the opportunity of being heard to determine whether or not the liabilities created by the audit are sustainable. Accordingly, it is, recommended that the C. B. R. direct the Collector to:

(i) Confront the complainant with the charges contraventions against it through a show‑cause notice giving it the opportunity of both written arid oral. defence before deciding the case on its merit through a formal Order‑in‑Original.

(ii) The amount already recovered in cash and adjustment of refunds against ability created in audit report may be adjusted/refunded as the case may be, in consequence of Order -in‑Original as in indicated in (i) above.

(iii) Compliance be reported within 30 days.

C.M.A./1049/FTO Order accordingly.